Markets
(ECB) speak rather than data was the most important driver for trading yesterday, especially on European markets. ECB’s Schnabel, seen as belonging to the hawkish camp within the ECB, in speech gave quite some weight to recent slowdown in growth. She admitted that underlying price pressures remained too high, but stopped short of making an outright call for an additional ECB interest rate hike at the September 14 meeting. Markets considered it as an indication that chances on a pause in the ECB hiking cycle are growing. In a data-dependent approach, this at least wasn’t conformed by the EMU August inflation print. In line with national data, EMU headline inflation at 0.6% M/M and 5.3% Y/Y (unchanged from July) printed higher than expected. Core inflation eased from 5.5% to 5.3%. In this respect, ECB’s De Guindos also took notice of slower growth, but didn’t expect a big change to the ECB’s inflation forecast. Similar conclusion: the debate on whether to pause or to hike is wide open. As was often the case of late, the market reaction erred to a dovish interpretation. German yields dropped from the open and this trend continued throughout the session, closing between 9.6 bps (5-y) and 5.8 bps (30-y) lower. Contrary to what was the case earlier this week, US data yesterday didn’t leave any room for a dovish interpretation. Weekly jobless claims printed at a lower than expected 228k. July spending data were strong (0.8%) and the PCE deflators printed as expected (core 0.2% M/M; 4.2% Y/Y up from 4.1%). The Chicago PMI expectedly improved from 42.8 to 48.7. Yields still declined between 2.3 bps (2-y) and 0.6 bp (10-y). In this respect, we also keep an eye at oil continuing its recent rebound ($ 87 p/b cf infra). Lower yields this time didn’t really help equities (S&P -0.16%, EuroStoxx -0.42%). Lower EMU yields also caused EUR/USD to (more than) reverse Wednesday’s rebound (close 1.0843 from 1.0923). DXY rebounded to the 103.60 area. However, a modest decline in USD/JPY (145.54 from 146.24) indicated it was mainly euro weakness rather than any big improvement USD momentum. Global euro weakness also pushed the EUR/GBP cross rate further away from the 0.861 area tested earlier this week.
This morning, Asian equites modestly trade with modest gains (Nikkei +0.42%) , supported by further measure from Chinese authorities to support growth and a better than expected Caixin Manufacturing PMI (see infra).
Later today, the focus is on the US payrolls report. US job growth in August is expected to slow down further to 170k from 187K. The unemployment rate is seen unchanged at 3.5%. AHE are expected at to ease slightly further to 0.3% M/M and 4.3% Y/Y. We don’t have a strong arguments to deviate from the consensus. However, the bar for the payrolls isn’t that high and after this week’s repositioning quite some dovishness probably is already discounted. Markets only see a <15% chance of a September Fed rate hike. So, the downside in yields might be better protected. In this respect also keep an eye at the US manufacturing ISM. A minor improvement (47.0) is expected. We don’t expect the report to really be a game-changer, but a positive surprise might temper the recent dovish market bias. Except in case of unexpectedly weak US data, the dollar again might be better protected. In EUR/USD the attempt to break above the downtrend channel top since mid-July is rejected. The 1.0766 correction low is first support. Also keep in mind that US markets are closed for Labour Day on Monday.
News and views
The People Bank of China (PBOC) announced that financial institutions will need to hold 4% of their FX deposits in reserve instead of 6% starting September 15. The FX reserve requirement cut is one of many measures announced this week to prop up the economy (and support the currency). Others include a reduction in down payments for mortgages, higher personal income tax deductions related to care and education and lowered stamp duty for stock trading were the others. The Chinese Caixin manufacturing PMI this morning showed an unexpected increase from 49.2 to 51. The private survey adds to signs that the manufacturing slump could ease after similar signs from the official PMI yesterday (49.7 from 49.3). The Chinese yuan this morning tried to build on yesterday’s gain, with USD/CNY temporary below 7.25. The move didn’t last though (7.2650). Asian stock markets are paring early profits as well.
Brent crude oil prices yesterday closed in on their early August/YTD top above $87/b. Russian deputy PM Novak said that Russia and OPEC+ partners agreed on further export cuts with details to be released next week. Earlier on the day, a bigger than expected drop in US inventories already pointed to tightness on the crude market.
