Markets
July was a pretty volatile month for core bonds. They gained in the first half before forfeiting much of those gains in the second part of the month. They continued the latter move at the start of August. In absence of any economic data of importance or other specific triggers, both US and German bond yields swung higher. Moves across the Atlantic range between 2-5.8 bps in a steepener with the 2-y yield slowly but steadily closing in on 5% again. The 10-y yield is trying to settle back north of 4%. Germany’s 2-y tenor ekes out a small 1.4 bps with the 3% barrier serving as a technical support zone. Changes on the remainder of the curve vary from +3.3 bps to 5.2 bps in a similar steepening move to the US. It’s a market reaction that could just as well have taken place yesterday following stronger-than-expected European inflation and growth numbers. Equity sentiment took a blow from a flurry of disappointing earnings, including BMW and Pfizer. It’s also simply a logical, healthy retreat after a stellar July month that brought the likes of the EuroStoxx50 beyond strong resistance levels and the S&P500 less than 5% away from its 2022 all-time high. Stocks today ease about 1% in Europe and half that in the US. The risk-off and UST underperformance gives the dollar a nice edge over its peers. The trade-weighted index jumps above intermediate resistance at 101.92 to fill bids around 102.36. EUR/USD goes deeper south, sub 1.10 to trade at the weakest level since its comeback early July. The Australian dollar is trading in the defensive after the Reserve Bank of Australia this morning defied analyst expectations for a 25 bps rate hike. Instead it opted for a hold and wants to await more economic data. AUD/USD drops towards the 0.66 area, a level that has marked the lower bound of a 2 big figure wide sideways trading range that has been in place since March.
The above was the setting markets found themselves in going into the publication of the US manufacturing ISM for July and the JOLTS report for June. Both came in slightly below expectations. Job openings still stand at a historically elevated 9582k vs 9600k expected and down from 9824k the month before. The manufacturing sector is showing tentative signs of bottoming out with the ISM rising from 46.4 from 46. Consensus was for a slightly bigger recovery to 46.9. Prices paid still drop sharply, be it slightly less than in June (42.6 vs 41.8). Manufacturers cut deeper in personnel (44.4 from 48.1) but new orders fell less dramatically last month (47.3 from 45.6).
News & Views
China’s currency regulators in recent weeks have asked commercial banks to either reduce or delay dollar purchases, news agency Reuters reported citing two people with direct knowledge of the matter. The informal instructions, also known as window guidance, were issued in a bid to slow the pace of the yuan’s decline. USD/CNY since hitting a correction low in January this year, has shot up more than 8% to around USD/CNY 7.25 by end of June. In July, a turnaround kicked in with the pair moving back south to 7.16 currently. The PBOC’s yuan fixing in recent weeks was also consistently (much) stronger than what analysts expected and the spot rate. Weak household confidence and thus consumption, a slowing (services) economy, troubled housing market and monetary policy divergence are the key elements for the weak yuan. Over the past few days, the Chinese government has announced a slew of measures to address the poor economic performance though it can take some time before they get implement and yield effect.
UK house prices according to the Nationwide Building Society in the twelve months through July fell by the most since 2009. The average house price was down 3.8% y/y on a monthly price decline of -0.2%. The drop was nonetheless slightly less than analysts expected (-0.5% m/m and -4% y/y). Nationwide’s chief economist Gardner said the challenging affordability picture helps explain the housing downturn. Mortgage interest rates have risen sharply in response to the Bank of England’s aggressive tightening cycle, accounting for an ever larger chunk in household expenses. Gardner remains cautiously optimistic on a soft landing for the market though: “While activity is likely to remain subdued in the near term, healthy rates of nominal income growth, together with modestly lower house prices, should help to improve housing affordability over time – especially if mortgage rates moderate once Bank Rate peaks.”
