Markets
It has been quite the challenge for both markets and analysts to find topics to spice up the trading day. We had set our hopes for today on the May PCE deflator release to perhaps, just maybe, possibly break the post-Fed stalemate on markets. That’s pretty difficult when the Fed’s favorite inflation gauge couldn’t be more close to expectations. The headline figure accelerated from 3.6% y/y to 3.9 y/y while the core measure rose from 3.1% to 3.4%. Investors understandably didn’t react. Inflation is high and above target but that’s not new and markets currently still buy into the “it’s all temporary” narrative. They also realize that from the June month on, statistical base effects start to drop out the equation. It means we normally should see less of these eyepopping inflation numbers going forward. The ongoing deadlock is also driven by this week’s flurry of contradicting Fed speeches, making it difficult for markets to pick a clear side. In this respect, we’re looking forward to the economic calendar for the upcoming week, which contains several key data including US ISM business confidence and the June payrolls. These could help investors making up their minds. For today however, we’ll just have to settle for a very slight US Treasury outperformance with the 5y yield declining 1.4bps. Other yield changes are negligible. German yields rise 1.1 bps (5y) over 1.6 bps (10y) to 2.1 bps (30y). Peripheral spreads are mostly unchanged. Italy (+2 bps) underperformed. European stocks underperform the US slightly, with small declines of 0.2%. In the US, both the S&P500 and Nasdaq open at yet another record high (+0.2-0.4%).
On FX markets, Anglo-Saxon currencies were under minor selling pressure. The dollar lost vs. all G10 peers but one (the pound). The trade-weighted USD gave up intermediate support around 91.74 and is testing the next at 91.6 (May interim high). EUR/USD rises towards 1.196 at the time of writing and eying resistance around 1.199. The currency pair thus recovered about 40% of the Fed-driven losses. Sterling extended declines in the wake of the Bank of England meeting yesterday. The British currency clearly hoped for a more hawkish signal instead of having to wait at least until August and possibly even longer (November). EUR/GBP leaps beyond 0.86.
News Headlines
According the June survey of the Confederation of British Industry, reported sales in June accelerated further, with the index rising to 25 from 18, the strongest level since August 2019 as spending resumes after the easing of lockdown measures. Sales for the time of the year also were reported strong (23) as were orders (30). At the same time, the volume of stocks compared to expected sales declined sharply further from -4 to -18 reaching the lowest level since the start of the series in 1983, a potential sign of supply bottlenecks. The Bank of England yesterday indicated that a significant progress in eliminating spare capacity and achieving the 2% inflation target sustainably is a condition to reduce policy stimulus.
German consumer sentiment as measured by the GfK institute improved faster than expected, rising to -0.3 from -6.9. Consumers are becoming ever more optimistic on the economic recovery with the business expectations measure also rising to the highest level in 10 year. Income expectations also rose substantially (31.1 from 19.5) as did price expectations (3.4 from -8.2). Willingness to save declined further. At the same time, willingness to buy still only rose in a rather gradual way indicating that consumer are still cautious despite the reopening from the lockdown.
