Markets
There was no lack of data yesterday. We had a stellar European (EC) economic confidence reaching the highest in 21 year. German HICP eased to 2.1% y/y in June due to non-favourable base effects. The US Conference Board consumer confidence later jumped from an upwardly revised 120 to 127.3 with a bounce in both expectations (100.9 to 107) and the current situation (157.7 from 148.7). US housing prices seared a record 14.6% y/y in another sign of a red hot housing market. Markets also witnessed a very successful second sale under the EU’s Next Generation programme and digested the announcement of monster bond issuance by a large, high-profile US tech company. US yields eventually closed half a bp lower at short and medium terms and about 1bp in the 20y and 30y. The German yield curve bear steepened with rates up 2 bps (10y) to 2.4 bps (30y). European stocks recouped a half percent of Monday’s losses, Wall Street finished an uninspired session almost flat. Safe haven currencies attracted most bids yesterday, with the Japanese yen leading, the USD second and Swiss Franc taking the bronze. EUR/USD struggled not to fall below 1.19 (down from 1.1925). DXY (trade-weighted greenback) closed north of 92. 0.859/0.861; that was yesterday’s EUR/GBP trading range. How do you comment that? Exactly, you don’t.
Asian sentiment is not so bad this morning, despite a disappointing (non-manufacturing) Chinese PMI (see below). Markets took comfort in Moderna saying its vaccine is effective against the Delta variant of the virus. That strain is advancing globally but is at the current stage particularly active in Asia. From Fed Waller’s comments overnight we retain that slowing MBS purchases would be the first tapering act to do, referring to the housing market being “on fire”. Core bonds trade lower, FX markets trade very quietly.
European inflation is forecasted to have slowed from 2% to 1.9% in June for reasons similar to the above-mentioned but with underlying price pressures still very much alive. Most attention will probably go to the ADP job report ahead of Friday’s official payrolls release. Consensus lies at a lofty 600k. Implications for the payrolls are hard to tell since both labour market gauges have been diverging sharply these last few months. However, we do believe labour market data in general will come in strong. There is an extremely high demand for workers by companies. Unlike previous months however, this demand could be met by a rise in the labour force since 26 US states have exited the enhanced unemployment benefits already this month instead of the general ending in September. A faster improving labour market would bring the focus on the Fed and policy normalization, sending both US yields and the dollar higher. 1.53% in the US 10y yield is the first resistance area. EUR/USD 1.1850 is a first support area.
News headlines
The Chinese June composite PMI this morning unexpectedly fell from 54.2 to 52.9. Details showed a stabilization of the manufacturing gauge (51 to 50.9) with the non-manufacturing index being responsible for the setback (53.5 vs 55.2). The latter is mainly due to the imposure of new restrictive measures to contain regional Covid-outbreak (Guangdong). The manufacturing PMI showed a discrepancy between waning external demand and rising domestic orders. Price (inflation) indicators fell, but remain at absolute high levels especially on the input side.
The OPEC+ meeting is moved to Thursday from Wednesday to allow for more time for talks. At stake is a sooner than expected new output increase to meet with rising global oil demand as economies reopen and recover. The current supply/demand imbalance pushed oil prices (Brent crude) to $75/b, the highest level since the end of 2018. OPEC+ needs to walk a tight rope though with the Delta Covid-variant possibly clouding growth prospects and with Iranian barrels expected to enter the market in case of revival of the nuclear deal. The Saudi energy minister also added that the group has a role in taming and containing inflation (by not letting prices spiral out of control).
