- European stock markets couldn’t profit from upbeat eco data and traded narrowly mixed in a sideways range. US stock markets opened with small losses.
- A euphoric mood among German constructors and manufacturers drove business confidence to an all-time high in October (116.7), according to the German IFO, reflecting optimism that an upswing in Europe’s largest economy has further to run. The forward looking expectations component also beat forecasts and rose to 109.1.
- US orders for business equipment increased more than forecast in September (+2.2% M/M vs 1% M/M), indicating solid investment momentum as the third quarter drew to a close. Shipments of capital goods orders excluding aircraft, which are used to calculate GDP, rose more than expected as well (+0.7% M/M vs 0.1% M/M).
- The UK economy’s surprise acceleration in Q3 (0.4% Q/Q vs 0.3% Q/Q expected) has paved the way for the Bank of England to raise interest rates for the first time in a decade next week. The ONS pointed out that service sector growth remained 0.4%, while manufacturing grew by 1%. Construction contracted for the second quarter in a row.
- Britain wants an outline agreement with the EU by the first quarter of 2018 on the transitional arrangements that will apply temporarily after it leaves the bloc, Brexit minister David Davis said. Davis also angered some lawmakers by suggesting that they might not get to vote on a Brexit deal until Britain has already left the EU.
- Catalan separatist leader Carles Puigdemont is likely to go to Madrid tomorrow to explain his position on independence from Spain and try to stop the national government imposing direct control on the region.
- Czech interest rates should head higher, central bank Vice-Governor Hampl said, adding he would prefer standard hikes of 25 bps each rather than a big jump. Yesterday, board member Nidetzky said the central bank may consider a 50 bps hike when it next meets. Another board member, Benda, has also said the economy would benefit from a 50-75 bps increase before the end of this year.
Rates
Core bond sell off continues
Core bonds remained under downward pressure today. Various factors conspired to the selling spree. Strong Q3 UK GDP, German IFO and US durable orders, nervousness before the ECB meeting and signs that the hawkish John Taylor is gaining ground in the battle to succeed Yellen as Fed chair. Technically, the US 10-yr yield finally broke above 2.42% yield resistance (the T-Note future fell below 124-14), triggering more selling. We would like to see the technical levels broken at the end of the week before drawing firm conclusions. US Treasuries underperformed German Bunds. At the time of writing, the German yield curve steepens with yields 0.6 bps (2-yr) to 2.1 bps (30-yr) higher. US yields increased between 2.6 bps (2-yr) and 3.5 bps (10-yr).
Intraday, the Bund lingered sideways till the releases of strong German IFO and UK GDP figures. The selling started in the gilt market, but it dragged also Bunds and US Treasuries lower. A second down-leg started on the strong US durable orders which pushed the US 10-yr yield above 2.42% resistance and triggered technically-inspired selling.
Currencies
Rise in core yields has mixed impact on the dollar
Trading in most major FX cross rates developed more or less along the same lines as was the case of late. Core (EMU and US) yields extended their rise supported by strong eco data (German IFO and US durable orders). This trend in core bond yields was again fairly neutral for EUR/USD as investors await tomorrow’s ECB decision. The pair held a relatively tight range in the upper half of the 1.17 big figure. USD/JPY and EUR/JPY were again the outright winners.
Overnight, Asian equity indices mostly traded with moderate to decent gains. Japan underperformed. Risk sentiment initially had little impact on the dollar. EUR/USD traded in well-known territory in the 1.1760 area. USD/JPY also held near yesterday’s level (high 113 area).
The rise in core (US & European) bond yields continued in Europe. The move was driven both by eco data and by technical considerations, but had a mixed impact on the dollar. The Germany IFO business confidence was very strong. The headline and current conditions indices printed at record highs. The initial rise of German/EMU yields was modest, but the move accelerated after a better-than-expected UK Q3 GDP. The subsequent rise in core yields was broad-based (UK, EMU but also US yields). Interest rate differentials even widened slightly in favour of the dollar. Still EUR/USD gained a few ticks and returned to the 1.1775 area. USD/JPY and EUR/JPY were again the main beneficiaries.
The rise in core yields accelerated further early in US dealings as the US 10-yr yield broke beyond the key 2.40% resistance area. A bit later, US durable orders were also stronger than expected. However, the rise in US yields nor the strong durable orders were able to support further US gains. EUR/USD tried a shy attempted to turn south, but the move was almost immediately blocked. EUR/USD trades currently just below the 1.18 handle. Investors apparently still don’t want to find themselves positioned short euro going into tomorrow’s ECB meeting. The durables this time also brought no further support for USD/JPY. The 114.45 range top is a too high hurdle. The pair tries to sustain north of the 114 big figure. EUR/JPY (134.45 area) is testing the September highs.
Sterling profits from decent UK Q3 growth
The focus for sterling trading turned from Brexit to the eco data today. UK Q3 GDP growth printed at 0.4% Q/Q and 1.5% Y/Y. The consensus only expected a rise of 0.3% Q/Q. Growth was again primarily driven by the services sector, but manufacturing production also added to growth supported by a rise in car production. The stronger Q3 GDP removed most market doubts on a BoE rate hike next week and kick-started quite an impressive sterling rebound. EUR/GBP traded in the 0.8965 area at the time of the publication but returned (temporary?) below the 0.89 big figure soon. The pair trades currently around 0.89. The rise in cable was even more impressive. The pair jumped from the 1.3120 area and trades currently in the mid 1.32 area. In comments before Parliament, UK Brexit Secretary Davis indicated that the Parliament may not be able to vote on the Brexit deal until after the UK has left the union. UK PM May dismissed this idea. This time, the Brexit divergence had only limited impact on trading. We understand the positive reaction of sterling on the stronger GDP but find it a bit exaggerated as it doesn’t raise the case for more than one rate hike.
