- European equities gain around 0.5% today with Spain underperforming as tomorrow’s Puigdemont deadline looms. US stock markets opened with modest gains.
- British pay growth has lagged behind inflation again, official data showed on Wednesday, adding to questions about how quickly the Bank of England will raise interest rates after an initial hike expected on Nov. 2. Britain’s jobless rate between June and August held at a 42-year low of 4.3%.
- A larger-than-forecast decline in US new home construction (-4.7% M/M) reflected the weakest pace of building in the South since October 2015, showing the fallout from hurricanes Harvey and Irma, according to government figures Wednesday. Building permits disappointed as well, declining by 4.5% M/M in September.
- Easy monetary policy gives euro zone governments a window of opportunity to enact the reforms needed to boost growth once interest rates have to rise, ECB President Draghi said.
- France’s central bank governor Villeroy called for a reduction in the ECB’s bond purchases towards "their possible end" in light of stronger inflation, while saying monetary policy should stay easy. ECB board member Lautenschlaeger called for a complete QE rollback in 2018.
- Steven Mnuchin said that there is "no question that the rally in the stock market has baked into it reasonably high expectations of us getting tax cuts and tax reform done". He added that the spectre of regulatory relief has also been priced into stocks.
- Germany’s top court threw out a cease-and-desist request that could have halted the ECB’s giant bond-buying program, offering some comfort to ECB policy makers as they prepare to extend the purchases into 2018.
- Spanish Deputy Prime Minister Soraya Saenz de Santamaria says the Spanish government will take control of Catalonia unless the regional leader withdraws his claim to independence by 10 am tomorrow.
Rates
Risk-on correction lower in core bond markets
Global core bonds lost ground today in a risk-on environment. USD/JPY eked out nice gains and European equity markets added 0.5%. The move mainly occurred in the European session with once again an outperformance of German Bunds vs US Treasuries (dovish ECB expectations & European political risk). The eco calendar only contained weaker-than-expected US housing data, but markets ignored them because of the big influence from hurricanes Harvey and Irma. ECB Lautenschlaeger and Villeroy both suggested ending QE next year. This is perfectly possible in the currently rumoured extension (to September 2018) and recalibration (from €60 bn/month to €30 bn/month). NY Fed President Dudley sounded confident in the US economy and holds on to a 3-rate hikes scenario this year.
At the time of writing, the US yield curve bear steepens with yields 1.7 bps (2-yr) to 4.2 bps (30-yr) higher. Changes on the German yield curve range between +0.6 bps (2-yr) and +2.5 bps (10-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany are nearly unchanged with Spain (+3 bps) underperforming ahead of tomorrow’s supply and with Catalan President Puigdement’s deadline looming. Spain’s deputy PM repeated Madrid’s warning today they would implement article 155, stripping Catalonia from its autonomy, if he declares independence.
The German Finanzagentur continued this week’s scheduled EMU bond supply with a rather weak 30-yr Bund auction (€1B 1.25% Aug2048). Total bids amounted only €1.34B, way below the €1.98B average at the previous 4 30-yr Bund auctions. The Bundesbank retained €0.19B for secondary market operations, resulting in an official bid cover of 1.7 (real bid cover 1.3).
Currencies
USD/JPY takes the lead in USD rebound
In technical trading, the dollar remained rather well bid, but the relative performance of individual USD cross rates was a bit different from earlier this week. The dollar gained hardly any ground against the euro, despite the Catalan uncertainty. Some ‘hawkish’ ECB comments probably blocked the euro decline. The pair trades in the 1.1765 area. USD/JPY outperformed, supported by a rise in core US & EMU yields and by a strong risk sentiment. USD/JPY trades in the high 112 area.
Overnight, the focus in Asia was on the opening speech of Chinese President Xi Jinping at the Communist Party congress, but there was little direct impact on global markets. Asian equity indices traded mixed. China outperformed. USD/JPY held a very tight range in the 112.20/25 area. EUR/USD hovered around 1.1765.
The dollar extended its gradual uptrend from earlier this week, but the ‘structure’ was slightly different. Until now, the dollar gained slightly more against the euro than against the yen. Today, it was the other way around. EUR/USD hovered in the mid 1.17 area, but USD/JPY made a nice intraday up-leg. We didn’t see a specific reason for this change. The ongoing equity rally maybe supports USD/JPY, but this argument was also in play earlier this week. There was market talk of Asian USD/JPY shorts being squeezed out of their positions. Whatever the reason, USD/JPY left its recent sluggish performance and jumped to the high 112 area.
Early in the afternoon, some perceived hawkish comments from ECB’s Villeroy hit the screens. The euro rebounded further off the intraday lows. US housing data (starts and permits) were again weaker than expected. However, they were disrupted by the impact of the hurricanes and didn’t hurt the dollar. In the end, EUR/USD trades little changed from the start of in Europe (1.1765 area). USD/JPY still shows a good gain, trading in the 112.85 area. This evening, the Fed will publish the Beige book preparing the November 01 meeting.
Sterling struggles as data suggest limited tightening
BoE gouvernor Carney kept a balanced approach yesterday on the trade-off between containing inflation and supporting growth. Markets assume that any BoE tightening will be limited as long as Brexit uncertainty continues to cloud the UK economic outlook. This assessment weighed on sterling yesterday and markets maintained their assessment after today’s labour market report. The report was mixed. Job growth was less than expected, but the unemployment rate remained at the historically low level of 4.3%. Wage growth was marginally stronger than expected at 2.2% Y/Y, but real wages remain negative (-0.4%). The small beat in wage growth didn’t change market expectations that any BoE tightening will be very limited (probably only one hike). EUR/GBP temporary dropped a few ticks, but the move was soon reversed. EUR/GBP trades currently in the 0.8940 area, further supported by the comeback of the euro this afternoon. Cable was mainly driven by the overall swings in the dollar. The pair trades in the 1.3165 area.
