Markets
The Jackson Hole symposium was no game changer. Still, markets yesterday concluded there is no reason to fight Powell’s cautious approach on policy normalization. US data were second tier (pending home sales and Dallas Fed manufacturing activity both printed softer). US yields held Friday’s post-Jackson Hole downward bias, declining between 1.4 bp (2y) and about 3 bp (5 & 10 y). The EMU calendar was more promising with EC confidence and German and Spanish CPI’s. EC confidence eased slightly but remains strong (117.5 from 119). German HCPI rose from 3.1% Y/Y to 3.4%, as expected. Spanish CPI surprised on the upside (3.3% from 2.9%). Even so, the combined EMU data wasn’t able to trigger an autonomous reaction on European markets. Bunds slightly underperformed Treasuries with yields varying from unchanged (2-y) to -1.7 bp (30-y). ECB’s Villeroy apparently supports the idea of reducing the pace of PEPP purchases in Q4 as financing conditions eased during summer. The dollar kept Friday’s losses. EUR/USD closed little changed at 1.1797. Easy monetary conditions, even in a context of doubt on the pace of the recovery, were enough for the S&P (+0.43%) and the Nasdaq (+0.90) to extend their record race.
This morning, news from China only raises doubts on the recovery. The China August manufacturing PMI eases from 50.4 from 50.1, but activity in the services sector tumbled below the 50 boom-bust level (47.5 from 53.3) due to restrictions to address the flare-up of corona variants. A high level committee preparing more regulation on a wide range of sectors to fight monopolies, battle pollution and shore up strategic reserves all adds to market uncertainty. Chinese equities underperform (CSI 300 loss 1.0%). Sentiment elsewhere in the region is more constructive (gains of up to 1%). The impact on the yuan is close to non-existent (USD/CNY 6.467). The dollar and US Treasury yields remain downwardly oriented. EUR/USD trades in the 1.1820 area. At 92.51, the TW DYX USD index nears the 92.47 support.
Today’s calendar contains US housing prices, Chicago PMI and consumer confidence (Conference Board). The latter is expected to ease from post-pandemic peak levels (123.0 from 129.1). In Europe, the preliminary EMU CPI data and German labour statistics are interesting. Both EMU headline (2.7% from 2.2%) and core CPI (1.5% from 0.7%) are expected to set post-pandemic peak levels. German/EMU yields are also held back by global uncertainty. Even so, both activity and inflation data suggest no need for a new downleg going into next week’s ECB meeting. For the German 10y yield, the -0.40%/-0.38% resistance is still within reach. The US 10-y yield probably needs outright positive surprises from the ISM’s and the payrolls to get the 1.37% first resistance back on the radar. The US data are also a wildcard for the dollar. In a daily perspective, the euro maintains the benefit of the doubt. The pair tries to regain the 1.1805 resistance. If it succeeds, the 1.1909/75 end July/end June peak levels are the next targets. Sterling shows no clear trend with EUR/GBP holding in the 0.8575 area.
News headlines
Scottish first minister Sturgeon sealed the innovative power-sharing agreement between her governing Scottish National party and Scottish Greens by appointing co-leaders of the Greens as “minister for green skills, circular economy and biodiversity” and “minister for zero carbon buildings, active travel and tenants’ rights”. While respective ministers Lorna Slater and Patrick Harvie won’t be part of the cabinet inner circle, they will have pivotal roles in cutting carbon emissions and introducing rent controls. Sturgeon will give her annual speech on the government’s legislative priorities later today at Holyrood (Scottish parliament). The pact with the Greens gives Sturgeon the numbers (MPs) to push for a second referendum on independence. They agreed to disagree on other areas such as aviation policy and how to measure economic success.
The European Union released the bimonthly update of its travel list. The most eye-catching change was removing the United States of America from the list, thereby advising against non-essential travel from the US into the EU. Member states still have the prejudice to lift the ban for fully vaccinated travelers. The move comes as the Delta variant spreads to the US with vaccination rates limping behind EU ones. Frustration that the US isn’t willing to drop restrictions on EU travelers probably added to the argument. EC President warned earlier this month that the EU wouldn’t allow the lack of reciprocity to drag on for weeks.
