- European equities recovered from initial weakness and trade currently around 0.3% higher with the Spanish IBEX 35 outperforming after yesterday’s losses. US stock markets opened near yesterday’s closing levels.
- German investor confidence remained near record high levels (87 from 87.9 in October) as stocks rallied and data signalled that Europe’s largest economy is on track for a solid expansion in the second half of the year. The forward looking expectations component rose from 17 to 17.6, but remained below consensus (20.0).
- US import prices rose at their fastest pace in over a year and more than expected (0.7% M/M & 2.7% Y/Y), suggesting inflation could pick up in the near term following months of sluggish readings. US industrial production rose by 0.3% M/M in September, in line with consensus, but manufacturing production disappointed (0.1% M/M).
- Consumer prices in the UK rose in September (3% Y/Y) at the fastest annual rate for more than five years, a pickup that will reinforce expectations the BoE could nudge up interest rates as soon as November.
- Dave Ramsden, the new BoE deputy governor for markets and banking has put himself on the dovish side of the BoE’s Monetary Policy Committee, saying underlying inflationary pressures are under control and Brexit entails significant risks to the economy.
- A second MPC member, Silvana Tenreyro, whose views were not known yet, suggested a more hawkish outlook than Sir Dave Ramsden, but she did not place herself in the camp on the MPC who thought a rate rise was likely to be warranted in the very short term.
- Goldman Sachs beat Wall Street estimates on a smaller-than-expected revenue decline at its struggling bond trading unit, gains in its private equity investments and higher fees from dealmaking. Morgan Stanley posted a much higher-than-expected quarterly profit as record revenue from its wealth management business helped offset the blow from a slump in trading activity.
- Germany’s next finance minister should be politically independent from Chancellor Angela Merkel, the leader of the Free Democrats (FDP) said on Tuesday, rebuffing calls to keep the ministry in conservative hands.
Rates
US Treasuries sensitive to higher import prices
Today’s European session resembled the one of yesterday: German Bunds gained ground, outperforming flat US Treasuries. Developments on the European political scene and dovish rumours about next week’s ECB meeting continue to play in the back of investors’ minds. A slightly disappointing ZEW-indicator (still at decent levels though) went unnoticed. Higher-than-expected US import prices broke the deadlock in the Treasury market, inflicting some losses. German Bunds followed the move lower, erasing some of the earlier gains. US industrial production data were too close to consensus to influence dealings.
At the time of writing, changes on the German yield curve are limited between +0.7 bps (2-yr) and -0.6 bps (30-yr). US yields shift 0.3 bps (30-yr) to 2.2 bps (5-yr) higher. On intra-EMU bond markets, 10-yr yield spread changes versus Germany narrow up to 2 bps.
The German Finanzagentur started this week’s scheduled EMU bond supply with a rather weak 2-yr Schatz auction (€4B 0% 2019). Total bids amounted only €4.22B, way below the €5.95B average at the previous 4 Schatz auctions. The Bundesbank retained €0.78B for secondary market operations, resulting in an official bid cover of 1.3.
Currencies
Dollar maintains a cautious bid
The dollar profited yesterday evening from headlines that chances had risen of John Taylor becoming the next Fed Chairman. Today, the dollar initially maintained yesterday’s gains, holding tight ranges against the euro and the yen. Finally, higher than expected US import and export prices triggered some marginal further USD gains. USD/JPY trades in the 112.40 area. EUR/USD hovers near the 1.1750 level.
Overnight, Asian equities continued their established uptrend as major WS indices closed again at record levels yesterday evening. Headlines on all kinds of political event risk were omnipresent, but they didn’t derail the global equity rally. USD/JPY failed to extend yesterday’s gains and traded in the low 112 area. EUR/USD traded marginally lower in the 1.1770 area
The dollar maintained its overnight gains against the euro, but there was no follow-through price action. EUR/USD settled in tight range roughly between 1.1755/75. EMU September inflation was confirmed at 1.5% Y/Y. German ZEW economic sentiment was slightly softer than expected, but remained at healthy levels. There was no noticeable impact on euro trading. Interest rates/interest rate differentials and/or equities showed no clear directional trend and were unable to guide FX trading. Headlines on Catalonia temporary moved a bit to the background as a factor for trading.
US import and export prices were slightly above consensus. The PPI and CPI data are much more important as driver for the dollar. Even so, the dollar gained a few tics upon the publication of the import prices, illustrating that (FX) markets are quite sensitive to US price data. US industrial production (0.3% M/M) was exactly in line with expectations. EUR/USD trades in the 1.1745/50 area, near the intraday lows. USD/JPY is changing hands in the 112.40 area. Prices in both cross rates are not that far from where they were this morning. Even so, the dollar still gets the benefit of the doubt.
UK inflation north of 3% doesn’t help sterling
Yesterday’s ‘urgency meeting’ between UK PM May and EU’s Juncker didn’t bring any concrete sign of progress in the Brexit process. Still markets apparently hoped on some positive fall-out in the days to come. Sterling traded with a cautiously positive bid this morning, going into the publication of the UK inflation data and the hearing of BoE governor Carney before Parliament. UK September inflation printed at 3.0% Y/Y, exactly in line with expectations. Sterling reached an intraday high just after the publication of the inflation data. After the CPI-report, BoE’s Carney and MPC members Tenreyro and Ramsden explained BoE policy before Parliament. Ramsden indicated he was no part of the majority within BoE that sees a case to raise rates in the coming months. Carney is part of that majority. However, he stressed that the BoE is still facing the difficult balance between supporting growth and activity and having inflation above target. His comments can be considered as an indication that any policy tightening will limited. Sterling more than reversed the initial gains Cable tumbled about one big figure and trades below 1.32. EUR/GBP rebounded well north of 0.89. (currently 0.8915).
