- European equities had a dull session, as recent gains are digested. Nevertheless some new (cycle or all-time) highs were registered (EuroStoxx), but daily gains are minor. Madrid still outperforms. US equities opened virtually unchanged (S&P/Dow) to slightly higher (NASDAQ).
- The euro zone economy grew faster than expected last quarter (0.6% Q/Q from an upwardly revised 0.7% Q/Q in Q2) and unemployment fell to its lowest (8.9%) in almost nine years. Inflation disappointed though with an unexpected setback in both headline (1.4% Y/Y) and core (0.9% Y/Y) readings.
- US eco data printed very strong. The Chicago PMI rose from 65.2 to 66.2 in October, the highest level since 2011. Consumer confidence rose to its highest level since 2000 (125.9) with both "present situation" and "expectations" components increasing. US labour costs accelerated in Q3 (0.7% Q/Q), leading to the biggest Y/Y increase in 2-1/2 years and offering hope that wage growth was finally gaining momentum amid a tightening labour market.
- Carles Puigdemont has said he will carry on the struggle for Catalan independence from Brussels, styling himself as the turbulent region’s legitimate leader despite being ousted by the Spanish government over the weekend. He signalled that he would accept the regional election on Dec. 21
- Britain is speeding up preparations for leaving the EU, employing thousands more workers to make sure customs posts, laws and systems work on day one of Brexit, PM May’s spokesman said. EU’s chief Brexit negotiator, Barnier, said he was ready to speed up divorce negotiations with Britain.
Rates
EMU/US eco data fail to leave trace on markets
Global core bonds lost marginal, technically insignificant, ground today. European trading was muted because of a German holiday. Several EMU/US eco data failed to leave permanent traces. We’ve argued before that the ECB downgraded the significance from EMU eco data for the next couple of months by extending its APP-programme by 9 months. The mixed bag of strong GDP, a drop in the unemployment rate and disappointingly low (core) inflation was easily put aside. The impact of very strong US eco data was even smaller. Tomorrow’s FOMC meeting will be a non-event while a December rate hike is largely discounted (87% probability). To wrap up: activity data remain strong on both sides of the Atlantic while (EMU) inflation is invisible. The trading session though is one to rapidly forget about.
At the time of writing, changes on the German yield curve range between -0.1 bp (30-yr) and +1.3 bps (5-yr). The US yield curve flattens with yield changes varying between + 1 bp (2-yr) and -0.5 bps (30-yr). On intra-EMU bond markets, 10-yr yield spreads versus Germany narrow up to 3 bps.
Currencies
EUR/USD drifts slightly lower in wait-and-see session
The euro traded with a negative bias against the dollar today, but losses were minimal. EMU activity data were strong with GDP up 0.6% Q/Q in Q3 and the unemployment rate dropping below 9% for the first time since the financial crisis. This was intrinsically euro positive news, but it came alongside weaker-than-expected EMU inflation. Headline inflation dropped to 1.4% Y/Y and core inflation dropped below 1% again. The latter was still a bit of a surprise even after the weak German inflation figures released yesterday. That was euro negative and the combination actually kept EUR/USD little changed in the tight 1.1625 to 1.1650 range. The early US data releases, employment cost index (0.7% Q/Q) and the S&P house prices were bang in line with expectations, leaving once more the dollar unchanged. However, the mid-session Chicago PMI (66.2 versus 60 expected) and the Consumer confidence (setting a 17-year high) were very strong and stronger than expected. EUR/USD briefly went to the session lows (1.1625), but conviction was once more missing. Concluding, eco data had little impact, as investors await the Fed and BoE meeting and the US payrolls. The sharp two day post ECB sell-off in the euro is over.
USD/JPY had an uneventful session, even if it gained minor ground in the European and early US session. It rose from 113.20 to 113.50 and now trades at 113.40. The Bank of Japan left its monetary stimulus program, as expected, unchanged today (8-to-1) and trimmed its inflation forecasts, echoing the European Central Bank’s cautious tone. Kuroda contributed to the dovishness at his press conference. He rejected the notion the BOJ should start discussing its exit plan as it is still far from its inflation target. So, the dollar performance against the yen was in fact very weak. Ever since the pair rejected the 114.55 resistance last week, dollar bulls saw no reason to go for another test. Yields, EUR/USD rate differentials and nearly unchanged equities were another reason for the unattractive FX session.
Sterling makes headway ahead of BoE meeting
Sterling extended its winning streak against the euro to 5 sessions. Technicals still underpin the sterling rally as do fundamentals with markets awaiting a rate hike on Thursday and the ECB still firmly on the dovish side, pushing forward any serious normalization of its ultra-easy policies. EUR/GBP dropped from openings levels around 0.8820 to 0.8780 currently. The lion part of the sterling gains followed comments of EU chief Brexit negotiator Barnier who said he is ready to speed up negotiations. The going will soon get tougher for sterling. For the UK currency to extend recent gains, the BoE should signal that this is more than a one-and-done deal. That’s unlikely. Inflation is above 2%, but largely on the back of a weaker sterling, not due to an overheating economy. Inflation expectations look well anchored and Brexit risk remains as high as it was. Growth is rather subdued and probably will slow further as households’ spending capacity is retrenching. Technically, EUR/GBP has now approached the 0.8756 support with the target of the double top at 0.8677 and the June low support at 0.8652. We expect the sterling correction to fizzle out before/at these supports after the BoE meeting Thursday. A buy EUR/GBP on dips closer to these levels is favoured.
