- European equities trade marginally higher on the day. US equities also take an uneventful start, opening with marginal losses.
- UK and EU negotiators have hailed progress in the latest round of Brexit negotiations. Despite upbeat comments by both sides, the EU says it may be weeks or months before talks can begin on Mrs May’s new goal of a transition deal that could maintain much of the status quo for a further two years after Britain leaves the bloc in 2019.
- Euro zone economic sentiment improved more than expected in September (from 111.9 to 113), reaching levels last seen in July 2007, with optimism rising in all sectors except financial services. German inflation disappointed, stabilizing at 1.8% Y/Y (0% M/M) while consensus expected an acceleration to 1.9% Y/Y.
- US eco data printed close to consensus. Weekly jobless claims increased slightly, from 260k to 272k, but remain distorted by the devastating hurricanes. The final figure of Q2 US GDP showed a marginal upward revision from 3% Q/Qa to 3.1% Q/Qa. The trade deficit unexpected narrowed from -$63.9B to -$62.9B.
- The ECB should fight high and low inflation with equal vigour, ECB Liikanen said, suggesting he had little tolerance for any eventual inflation overshoot. ECB Praet said "Things are going on the real (economy) side much, much better, but the job is not yet done. Now we are talking about recalibration. The end of the story is not yet written."
- The Bank of England holds significant sway in influencing inflation, but it can’t solve broader challenges and is limited in its ability to soften any blow from Brexit, BoE governor Carney said.
Rates
Core bond selling slows, but curve steepening alive
Core bonds started to decline in early Asian trading, likely triggered by Trump’s tax reform plan and its potential reflationary effects. Overnight hawkish comments of Boston Fed Rosengren were a reminder that the Fed continues its gradual tightening rate path despite low inflation. The bond selling slowed and profit taking kicked in (and EUR/USD turned north) when European equity trading started. However, we didn’t see some causality as the equity rally never went far. Curve steepening continued, while the US-German yield spread stabilized. EMU eco data were mixed with German and Spanish inflation slightly below expectations, but economic sentiment indicators very strong and better than expected. US eco data were a bit better than expected with a lower trade deficit and higher inventories, both contributing positively to Q3 GDP. However, we don’t think the eco data were influential for trading. At the time of writing, German and US yields increased by up to 2.5 bps at the 30-yr tenor. Summarizing, bond selling slowed, probably due to some fatigue, profit taking and the absence of new bond negatives.
ECB Villeroy called for being pragmatic in reducing QE intensity. He referred to what they did in December (lower monthly amount of purchases). He suggested that the ECB will keep policy loose, including by keeping rates negative until sustainable rise in inflation. It pushed the Bund modestly higher to intraday highs, but wasn’t the trigger for the turn.
The Italian debt agency successfully tapped the on the run 5-yr BTP (€2.5B 0.9% Aug2022) and 10-yr BTP (€2B 2.05% Aug2027). The combined amount sold was the maximum of the €3.5-4.5B target range with a solid 1.65 bid cover. Addtionally, the debt agency sold €1.5B of a floating rate bond (7-yr CCTeu). The US Treasury ends its refinancing operation tonight with a $28B 7-yr Note auction. The WI currently trades around 2.17%.
Currencies
USD profits as reflation trade resumes
Yesterday, the dollar made nice gains supported by a flaring up of the global reflation trade. This pattern was at least partially interrupted today. Core yields maintained an upward bias, but the dollar didn’t make any further progress. The US currency even corrected slightly lower. EUR/USD trades in the 1.1785 area. USD/JPY is changing hands around 112.60. For now, we consider it a breather on this week’s solid USD performance.
Asian equities showed again a mixed picture. USD/JPY returned to the 113 area, spurted by a further rise in US yields. The impact of a rising dollar and higher US yields on other Asian/EM markets was mixed. EUR/USD (1.1735 area) held within reach of yesterday’s correction low.
The rise in US yields in Asia suggested that yesterday’s reflation trade, including the rebound of the dollar, had still further to go. However, this was not the case. USD/JPY and EUR/USD came with reach of yesterday’s top (113.26) and yesterday’s low (1.1717), but a real test or a break didn’t occur. The dollar rebound needed a breather. The confidence data of the European commission were strong. Maybe they supported a rebound of the euro, but the move had already started before the publication of the report. ECB speakers (including Villeroy and Hansson) also suggested that the impact of the recent rise of the euro on growth might be rather modest. EUR/USD traded gradually higher throughout the morning session and changed hands in the 1.1775 area around noon. USD/JPY failed to sustain above 113 and returned to the 112.70/60 area. The latter suggests that USD profit taking prevailed. Interest rate differentials between the euro end the dollar were negligible as a factor for USD trading. As said, the dollar rebound simply needed a breather.
US Q3 GDP was confirmed little changed at 3.1% QoQa. The August US trade deficit was substantially smaller than expected and inventories grew rather strongly. The data are supportive for the US Q3 GDP. The intraday decline of the dollar slowed during the US hours, but for now there is no sign of an extension of the recent USD rebound. USD/JPY trades in the 112.60 area. EUR/USD trades near 1.1785. The dollar rally apparently needs more good news.
EUR/GBP holds near recent lows
Sterling had somewhat of a roller-coaster ride today. At the BoE independence conference, BoE’s Carrey said there were limits to the amount of economic problems the Bank can solve. At the same time, he reiterated that the Bank will support the UK through the Brexit process. In this context, he didn’t give much weight to the recent rise in inflation. Markets considered it a dovish assessment, triggered further euro selling. The headlines from the UK-EU Brexit negotiations also weren’t too positive. EU’s Barnier said the Florence speech created a new dynamic. Even so, it can still take weeks or even months to achieve sufficient Brexit progress. Sterling was sold both against the euro and the dollar. EUR/GBP rebounded temporary north of 0.88. However, sterling still showed good resilience. The sterling decline was almost fully reversed in the afternoon session. We didn’t see any ‘hard, high profile news’ to explain the move. Whatever. EUR/GBP trades again in the 0.8775 area. Cable hovers at around 1.3435. Over the previous days, the sterling rally (against the euro) lost some momentum, but there is no clear sign of a real countermove.
