Markets
The European trading session kicked off grim. Stock losses mounted to >1% despite more balanced Asian dealings. Cyclical equities suffered the most, suggesting lingering uncertainty on the coronavirus was probably to blame. Sentiment turned a bit for the better in late afternoon with indices cutting earlier losses by about half. That wasn’t visible in core bond yields though. German yields trade near intraday lows. The curve bull flattens with changes varying from -0.5 bps (2y) to -3.4 bps (30y). European inflation as expected eased marginally from 2% to 1.9% but came with little direct impact on markets. It’s a statistical blip anyways. Base effects and Covid-era spending habits used in the inflation basket’s weights (with travel, leisure and hospitality being underrepresented just at a time where the sector is reopening) exert downward pressure on this month’s and probably the next reading. Spread changes are limited to -1/+1bp across the European periphery. US yields followed a similar trajectory to Germany. Here, today’s focus was on the ADP job report. Employment rose with 692k. A lesser 600k was expected, but with last month’s downgrade to 886k from 978k, the figures are bang at consensus. Leisure and hospitality accounted for about half of the job increase (332k), followed by education & health care (123k) and trade & transportation (62k). The goods-producing sector added 68k jobs, 47k of which in the red-hot construction sector. The figures bode well for Friday’s official payrolls report though we must add that the link has been rather loose lately. The whisper number in any case rose to 789k vs. the 711k Bloomberg survey. US rates staged a lackluster attempt to leave the lows behind but only really succeeded doing so at the short end of the curve (now flat). The 10y and 30y yield are 2bps down with both trading near the lowest level since June 21. Mind you that we’re also at the end of the quarter, with market rebalancing in the run-up usually in favour of core bonds.
Given the shaky (equity) sentiment, it’s no huge surprise the dollar is having a minor upper hand vs. peers. EUR/USD slipped below 1.19 after which intermediate support near 1.188 fell to currently trade around 1.187. The DXY dollar index extends gains beyond 92(.24) and is nearing the post-Fed spike of 92.4. One remarkable resilient currency today is the Swedish krone. Tomorrow’s Riksbank policy meeting is accompanied by a new monetary policy report which will probably paint a rosier picture than it did back in April. Speculation might be building the central bank is ready for a hawkish tilt in line with the more global shift and as Sweden is recovering nicely from the pandemic. EUR/SEK fell from 10.16 to 10.10. Even with a doubling of yesterday’s trading range, EUR/GBP was a dull graph to look at. The pair’s topside was still capped at 0.861 but ventured a little bit more south to mark 0.857 as an intraday low. Some hawkish comments from outgoing Bank of England chief economist Haldane failed to inspire trading.
News Headlines
June Polish inflation slowed more than forecast, rising by 0.1% M/M and 4.4% Y/Y, vs 0.3% M/M and 4.6% Y/Y consensus. Headline inflation was a decade high 4.7% Y/Y in May. Details aren’t released yet, but we estimate that core inflation slowed from 4% Y/Y in May to 3.4% Y/Y in June. The slight deceleration of inflation – though still above the central bank’s inflation target – suggests that the NBP could easily stick to its very accommodative stance. The Polish zloty didn’t respond to the data. EUR/PLN currently changes hands around 4.52.
Agustin Carstens, general manager of the Bank of International Settlements told the Financial Times that developing economies should starts adapting to a world with reduced fiscal space, a lack of monetary space, higher corporate debt, higher sovereign debt as well as an entrenched low capacity for growth. He added that it’s the first time that advanced economies’ growth is above global growth and that global growth is above emerging market growth. Developing markets so far managed to get through the pandemic without a financial or economic crisis, but there is still a substantial risk of one, Carstens added.
