- European equities are up slightly more than 0.5%, which was mainly the gain at the opening (catching up with WS). During the session, there was no consistent directional bias. US equities open nearly flat.
- Eurozone economic confidence hit a pre-crisis high. The EC’s economic sentiment indicator rose to 111.9 in August, compared to consensus forecasts and July reading of 111.3. The improvement was broad-based across sectors (manufacturing, services, retail and consumer). It points to ongoing strong or even stronger growth in Q3.
- The August US ADP employment report was very strong. ADP reported a net increase of 237 000 jobs in the private sector, more than the 185 000 expected. On top of it, the July job creation was revised higher to 201 000 from 178 000 reported previously. The gains were broad-based. It raises the expectations for Friday’s payrolls report.
- Brits are still buying houses (surprise, surprise), but UK consumer credit appears to be coming off the boil, judging from the latest data of the BoE. Meanwhile, some companies at least appear to be borrowing while the going’s good. Borrowing by manufacturing firms rose surprisingly strong.
- Moody’s raised the growth forecasts of the euro area and sees now above potential growth in 2017 and 2018. It raised the forecasts for the German GDP to 2.2% this year and 2% next year. For France, it now sees 1.6% growth in both years (up from 1.3% and 1.4%), while even laggard Italy should grow by 1.3% in 2017/18 (up from 0.8%/1.1%).
- Analysts are still increasing the estimated cost of the passage of tropical storm Harvey, which is now making a second landfall, in Louisiana. History tells us that these costs impact short time some economic data, but not the underlying trend as repair work pushes growth higher beyond the short term.
- Spanish inflation rose to 2% Y/Y in August, up from 1.7% Y/Y in July and exceeding expectations for a 1.8% Y/Y increase. Belgian inflation crept higher to 1.9% Y/Y from 1.78% Y/Y previously.
- German HICP inflation rose to 1.8% Y/Y in August, up from 1.5% Y/Y in July and exceeding expectations for a 1.7% Y/Y increase. Coming on the heels of stronger Spanish HICP and Belgian HICP inflation, the risks for tomorrow’s euro area inflation on the upside of the expected 1.4% Y/Y reading (up from 1.3% Y/Y in July). The higher inflation readings might be due to base effects and energy prices, more than increases in underlying inflation.
- US Q2 GDP was revised higher to an annualized 3% from 2.6% previously. The revision was largely due to the upward revision of consumption and business investment. That’s a qualitative good revision and it likely leads to a bigger overhang for Q3, which may also come in around 3%.
Rates
Core bonds limit losses amid strong US/EMU eco data
Yesterday’s potential technical trend reversal signal didn’t find an audience today despite a batch of stronger-than-forecast eco data. The jury is still out with EMU CPI and US payrolls still coming this week. The damage in the German Bund and US Note future remained limited today. The US yield curve bear steepens with yields 0.7 bps (30-yr) to 2.2 bps (2-yr) higher. Changes on the German yield curve vary between +0.5 bps (2-yr) and +2.4 bps (10-yr). On intra-EMU bond markets, 10-yr yield spreads narrow up to 3 bps (Portugal).
The German Bund opened lower copying the US T-Note’s losses in Asian dealings. The down-move was rapidly blocked though and followed by some technically insignificant return action higher. EC EMU confidence indicators, Spanish inflation and (regional) German inflation all beat consensus, but couldn’t inflict losses on the Bund. The tepid comeback of (European) stock markets and weakness in oil prices (Hurricane Harvey after all?) offer a partial explanation. As US investors joined dealings, core bonds tested the intraday downside once more, but the move was lackluster in nature despite another stellar ADP-report which bodes well for Friday’s US payrolls. The upward revision of US Q2 GDP to 3% Q/Qa also fell in deaf man’s ears.
The Italian debt agency tapped the on the run 5-yr (€3B 0.9% Aug2022) and 10-yr BTP (€2.5B 2.05% Aug2027). The combined amount sold was the maximum of the targeted €4-5.5B. The auction bid cover was 1.58 which is rather good for Italian standards. Additionally, the Tesoro raised €1.75B via a floating rate note. The Finnish Treasury launched a new 10-yr benchmark via syndication (€3B Sep2027). The bond was priced to yield MS -24 bps, down from initial price takings around MS – 21 bps.
Currencies
Dollar rebounds; Euro ignores higher EMU inflation
The dollar extended the rebound which started yesterday in the US. Technical considerations prevailed, but good US eco data (strong ADP and upward revision of the US GDP) and positive risk sentiment reinforced the rebound. EMU inflation data were also higher than expected, but contrary to what was the case of late, they couldn’t inspire euro bulls.
Overnight, Asian equity markets showed gains of about 0.5%/1.0% as uncertainty on North Korea subsided. USD/JPY held in the upper half of the 109 big figure as a better global sentiment supported the dollar across the board. EUR/USD stabilized in the 1.1975 area.
European markets also entered calmer waters after the constructive price action in the US yesterday evening, but the rebound of European equities was modest, given yesterday’s losses. Still, the improved risk sentiment supported a further rebound of the dollar. EUR/USD dropped to the mid 1.1250 area. USD/JPY jumped temporary north of 110. The EMU eco data (EC confidence data, German inflation) were strong/better than expected, but the impact on EMU interest rates and on the euro was limited. Interest rate differentials were again no significant factor for FX (EUR/USD) trading. Global market sentiment and technical considerations (USD short squeeze) prevailed.
The dollar remained well bid as US traders joined the action and gained slightly further ground. A very strong ADP labour market report (237 000 net job growth) and a slight upward revision of the US Q2 GDP reinforced the dollar bid. Core yields returned to the intraday highs. USD/JPY trades in the 110.25 area. EUR/USD drifted to the low 1.19 area and trades currently at around 1.1925/30.
Conclusion: the dollar extended yesterday’s rebound. A better risk sentiment supported the move, but technical considerations rather than fundamentals (data, expectations on the Trump administration) or interest rate differentials prevailed as driver for the rebound. EUR/JPY holds within reach of the recent highs which also indicates that the current move is a USD rebound rather than a euro correction. Key eco data later this week now have to decide whether there is room for a more fundamentally driven USD comeback.
EUR/GBP: profit taking, at last…
Global market positioning also dominated sterling trading today. The UK specific news flow remained sterling negative. The stalemate in the Brexit negotiations persists and the UK July money supply and lending data were softer than expected. Even so, EUR/GBP joined the correction of EUR/USD. EUR/GBP trades currently in the 0.9230 area. Remarkably, cable held up relatively well despite the overall USD rebound. This suggests some underlying GBP strength. We assume that technical considerations were also the main driver of this move. (profit taking on the recent, protracted EUR/GBP rally). At the same time, a further GBP-decline would at some point bring higher inflation again on the radar of the BoE. Let’s call it some kind of self-destroying aspect of the recent GBP decline against the euro.
