- European equities trade modestly higher in a calm session. Madrid profits from the easing of tensions to outperform (+1.6%). US equities opened slightly higher.
- The ECB policymakers are keen to press ahead with plans to end their bond-buying spree next year, despite some reservations on wage inflation and the strength of the euro. Governing council members were increasingly confident that the recovery would last. Market developments were favourable, while there were "nascent" signs of reflationary forces
- Sterling took a fall, slipping against both the dollar and the euro, after a calamitous speech by PM May boosted political uncertainty. The move brings sterling to a one-month low against the dollar. A critical speech by Mrs May on Wednesday was overshadowed by issues, including a prankster handing the prime minister a P45 redundancy slip.
- Switzerland’s return to inflation seems to be taking hold, with the Y/Y pace of price rises reaching 0.7% in September, the highest since March 2011. August’s rate was 0.5%. Deflation reached its most severe point in August 2015 when inflation was down 1.4% Y/Y.
- Swedish industrial production fell more than economists expected in August, with July’s figures revised down. Industrial production fell 1.7% M/M. The SEK (EUR/SEK 9.52) held on to the big gains of the last three days.
- Saudi Arabia will continue working with Russia to stabilise global oil markets, the country’s King said during talks with Russian President Putin in Moscow, where the two leaders discussed the war in Syria and other issues.
- US initial claims dropped a slightly bigger than expected 12K to 260K in the most recent week, gradually unwinding the surge after the passage of the hurricanes. The US trade deficit was marginally lower than expected at $42.3B in August. It was an 11 month low and follows a $43.6B deficit in July. Exports rose 0.4% M/M, imports fell 0.1% M/M. It suggests the global economy is doing well and the US profits from a weaker dollar.
- Philly Fed Harker said he (together with 9 other governors) projects three rate hikes in 2017, suggesting that he will vote for such an increase at the December meeting. He admits there are some issues with inflation but also calls the economy "incredibly resilient."
Rates
Slight outperformance longer end of the German curve
Ahead of the key US payrolls tomorrow, core bonds had an uneventful session. The Bund had a difficult start, but rebounded at a snail’s pace from mid-morning onwards. The morning session was devoid of market moving economic reports and comments of ECB’s Praet about the need for sufficient convergence before euro adoption had understandably no impact. We saw already a few days a mild tendency to buy German bonds on dips and that might also have been the case today. The Minutes of the last ECB meeting, published in early afternoon, were interesting suggesting that the ECB might recalibrate its purchases by buying less, but compensate by buying for longer. The ECB should also use the forward guidance on rates to keep expectations for a rate hike at bay for longer. Of course, decisions still need to be taken and many details remain unknown. Anyway, the Bund went down for a brief moment after the release, but erased the losses soon.
The US Treasuries kept a sideways trading mode throughout the session, unmoved by the eco releases, which were close to expectations. Philly Fed Harker sees another rate hike this year and Fed Williams said that inflation will rise to 2%, enabling the Fed to raise rates. The remarks of Williams might have triggered some modest (temporary) selling, but not enough to give US Treasuries firm direction. After closure of our report, the factory orders report will be published followed later on by speeches of Fed governors Dudley and Bullard. However, with the payrolls looming, we expect trading to remain quiet and technical uneventful.
At time of writing, German yields are up 0.8/1 bp in the 2-to-5-yr sector and were nearly flat in the 10-30-yr sector. US yields rose up to 2 bps across the curve. On intra-EMU markets, tensions surrounding the Spanish political situation eased a bit, allowing a modest narrowing of the 10-yr yield spreads. Spain and Italy outperformed with a 6 bps narrowing.
The Minutes of the September ECB meeting were interesting and showed that governors were keen to press ahead with plans to end the bond buying programme next year despite some reservations about the (weak) wage inflation and the euro strength. They were increasingly confident the recovery would last and saw "nascent" signs of reflationary forces. The Minutes indicate that the ECB is unlikely to follow the Fed’s method of gradually slow the pace of bond purchases. The focus of the debate is on two issues: the degree to which they will slow the pace of purchases and for how long they will keep buying (the recalibration). The benefits from a longer intended purchase horizon combined with a greater reduction in the amount were compared to a shorter period of purchases and larger monthly volumes. The accounts suggest some governors prefer a slower-for longer approach. It also suggest that the council will use the forward guidance on rates to keep monetary policy loose.
Currencies
EUR/USD drifting lower in the 1.17 big figure
Today, there was again no clear story to guide USD trading. There were only second tier eco data in the US and Europe. Tensions on the Spanish markets eased, but didn’t cause a sustained euro rebound. In the afternoon, some ‘hawkish’ Fed comments caused modest dollar gain of the dollar. However, EUR/USD (1.1720 area) and USD/JPY 112.60 area trade still are range-bound.
Overnight, Asian markets showed a mixed picture. Japanese indices were little changed and so was USD/JPY (112.75 area). Australia August retails sales were very weak. AUD/USD declined 0.7865 to the 0.7830 area. EUR/USD held a very tight sideways range in the 1.1760 area.
As was the case yesterday, there was again no clear story to guided trading in EUR/USD or USD/JPY during European trading. The tensions on Spain eased with equities rebounding and Spanish spreads narrowing. EUR/USD tried to go higher early in Europe, but soon settled in a tight sideways range roughly between 1.1750/80. The Minutes of the September ECB meeting suggested that the Bank could reduce bond buying by a substantial amount, but keep the buying for longer. The impact on European bonds or the euro was limited. If anything, the euro felt some modest selling pressure.
The dollar gradually received a better bid as US investors joined trading. Fed’s Harker and Fed Williams defended another rate increase in 2017. The comments reinforced the USD bid. EUR/USD trades currently in the 1.1720 area. USD/JPY also rebounded off the intraday lows; but at 112.60 the pair trades in negative territory compared to yesterday’s close. In a broader perspective, the dollar is still in consolidation modus, awaiting more higher profile news before starting a new directional trend. Maybe tomorrow’s payrolls can do the job.
EUR/GBP squeezed back above 0.89
Sterling came under pressure from the start of trading in Europe. There were no UK eco data releases. In the (financial) press there were extensive analyses of the ‘failed’ key note speech of UK PM May at the annual meeting of the Conservative congress. The ‘event’ only raised more questions whether May is the right person to lead the Conservative party and the UK throughout the tumultuous Brexit period. This additional uncertainty on the political support for PM May weighed on sterling. The EUR/GBP short-squeeze accelerated as the pair broke the 0.8900/07 resistance area. After the initial break higher, EUR/GBP settled in a tight range around 0.8925. The currency lost also ground against the dollar. Cable trades currently below the 1.3150 handle. The down-leg in the currency pair even looks like accelerating. Later today ,BoE McCafferty and Chief economist Haldane are still scheduled to speak. If monetary policy issues are addressed, they will probably defend the scenario of a (limited) tightening in the near future.
