Markets:
ECB President Lagarde yesterday indicated a discussion on the euro exchange range. In official communication, she said little more than that the FX rate is not a policy target. The 5% rise of the trade weighted single currency since May didn’t really filter through in fresh inflation and GDP forecasts neither. Today’s speeches by ECB governors highlighted quite some diverging views. Chief Economist Lane, who started the debate last week by stating that the FX rate matters (in setting policy), repeated his concern that the euro’s rise dampens the inflation outlook. For Lane it should be abundantly clear that there is no room for complacency given the negative impact of the pandemic on projected inflation dynamics and downside risks to an already uncertain eco outlook. His comments clearly put him in the camp of governors preferring to err on the side of caution by adding accommodation. ECB Villeroy de Galhau put himself on Lane’s side. “We don’t target exchange rates. But obviously the exchange rate does matter for inflation and monetary policy. And accordingly we will carefully monitor developments in the exchange rate, with regard to its implications for the medium-term inflation outlook”. ECB Vasliauskas is on the other side, pointing out that recent euro gains are historically not exceptional. ECB Schnabel recently stated that negative effects from a weaker euro are countered by the positive effect on global trade from a weaker dollar. The split within the ECB in any case is something to follow up on. We expect markets to put the central bank up for the test, suggesting some more by default euro strength. EUR/USD today switched sides around the 1.1850, benefiting the euro.
Sterling weakness remains a dominant trading theme. EUR/GBP approached the 0.93 big figure for the first time since March today. The brexit chaos is dominant with UK PM Johnson’s threat to break international law by rewriting part of the withdrawal agreement raises the odds of a hard, chaotic brexit at the end of this year in absence of a trade deal. EUR/GBP pierced through 0.9176/0.9184 resistance yesterday, which actually paves the way for full return action towards 0.95. GBP/USD treads water near yesterday’ sell-off low of 1.28.
Core bond markets trade with a small upward bias. Changes on the US yield curve range between -0.1 bp and -0.5 bps. German yields lose 2.1 bps (2-yr) to 3.6 bps (30-yr), bull flattening the curve. The move is mainly a catch-up with lower US yields during yesterday’s US session following US stocks’ 2% retreat. Today’s eco calendar only contained US CPI inflation. Both headline and core CPI beat consensus, rising by 0.4% on a monthly basis. Y/Y outcomes for headline (1.3%) and core (1.7%) also exceeded forecasts. Markets at the moment don’t really bother given that the Fed switched to average inflation targeting and given that inflation remains below the 2% target. Stable stock and oil markets provided no input for FI trading today.
News Headlines:
The UK secured its first important post-Brexit trade agreement, reaching a deal with Japan today.UK Trade Secretary Liz Truss labeled the deal as historic. According to the UK, they will make 99% of their exports to Japan tariff-free. It could increase trade by 15.2 billion pounds in the long run, compared with 2018.
Industrial production in Spain rose far more than expected in July. Production rose 9.3 % M/M. The rise in July still left output 6.4% lower compared to the same period last year. The rise was supported by a strong rebound in durable goods orders (14.2%). Output in mining and quarrying (+10.2%) and pharmaceutical productions (9.0%) printed already well above the levels of the same period last year. However, the recovery in the Spanish economy remains uneven as the rebound in production isn’t mirrored in a similar development in the services sector.
