Markets
Easy base effects due a high monthly EMU CPI reading last year already foreshadowed a substantial cooling of EMU headline inflation this month. On top of that, German (2.0%) and Spanish (2.4%) national data published yesterday surprised slightly to the downside. Maybe there was room for the EMU figure to also touch the psychological barrier of 2%? This didn’t materialize. The August Flash CPI printed exactly in line with consensus (headline 0.2% M/M and 2.2% Y/Y, core 2.8% from 2.9%). Slightly higher than expected French data prevented the hoped for bigger decline. Aside from favourable base effects, disinflation was mainly driven by lower energy prices (-1.0% M/M and -3.0% Y/Y). However core inflation (ex-energy, fresh food, alcohol & tobacco) still rose 0.3% M/M and 2.8% Y/Y. Services inflation is holding well above an underlying dynamics of 2% (0.4% M/M and 4.2% Y/Y from 4.0%). Core data only confirm that disinflation hasn’t reached a point yet for the ECB to pre-commit on the pace of further easing beyond the September meeting. In this respect, ECB’s Schnabel already before the CPI release indicated that policy still has to focus on inflation. Any easing should proceed gradually and cautiously as inflation momentum continues to be (too) high. In this context, there is no reason for markets to leave current indecisive pricing between 2 or 3 25 bps ECB rate cuts for the 3 remain meetings of this year. In the US, July personal income (0.3%) and spending (0.5) confirmed that the consumer stays in good shape. The closely watched price deflators also were almost exactly as expected (0.2% M/M and 2.5% Y/Y, core 0.2% M/M 2.6% Y/Y). The reaction to the data was limited. Yields drifted cautiously higher, confirming a ST bottoming pattern going into the US long weekend (Labour Day on Monday) and ahead of next week’s key data releases (ISM’s, payrolls). US yields add between 3.0 bps (2-y) and 0.5 bp (30-y). Similar pattern for in the EMU with the German 2-y yield adding 3.5 bps. The 30-y trades little changed. On FX, the dollar still extends its comeback but gains are more modest compared to yesterday and Wednesday (DXY 101.55 from 101.37, USD 1.1065 from 1.1075). EUR/GBP tested the 0.84 barrier, but no break occurred yet (0.8415). Equities still (gradually) extend the rally post the early month sell-off (Eurostoxx 50 + 0.1%, S&P +0.5%).
News & Views
The Chinese central bank has begun to actively trade government bonds in the market. In a statement on its website, the PBOC explained that it sold long-dated bonds while buying ones with shorter maturities. The combination resulted in a net purchase of CNY 100bn. There has been speculation about this for months after the central bank warned multiple times before taking other actions earlier in August on the investor stampede into the government bond market that pushed (long-term) yields to the lowest in many years. The Silicon Valley Bank saga in mind, Chinese authorities fear the liquidity and broader financial stability consequences in case of a sudden market reversal. At the same time, the central bank is seeking a steep-enough yield curve to provide incentives to invest and lend – hence the operation twist – at a time when the Chinese economy is struggling to regain traction. Both the Chinese yuan and yields reacted stoic though the news got out in late Asian trading hours. USD/CNY is extensively testing the December 2023 2-yr low around 7.08.
The Canadian economy grew a more than expected 2.1% q/q (annualized) in Q2 of this year. That is quicker than the 1.8% seen in Q1 and penciled in by analysts. Government consumption was a major driver, adding 1.27 ppts to the number. Household consumption contributed a mere 0.34 ppts. Business investments added some 0.8 ppts, about evenly split between business and governments. A drop in imports did not make up for the bigger decline in exports, producing a net export contribution of about -0.4 ppts. The Canadian dollar and government bond yields pared a kneejerk move higher after the growth details nuanced the headline beat. USD/CAD is trying to recover the 1.35 big figure on USD strength as well. Canadian yields maintain some of the gains but it’s limited to 2.0 bps at the front end of the curve. Money market expectations for the Bank of Canada’s meeting next week barely budged with a third 25 rate cut more than priced in.
Graphs
USD/CAD: Loonie doesn’t profit from better Q2 Canada GDP growth. BoC expected to continue easing next week.
Dow Jones industrial Index more than reverses early August sell-off to set now all time record on hoped for soft landing of US economy
USD/CNY testing end 2023 low as yuan strength takes over from USD correction earlier this month.
US 2y yield shows ST signs of bottoming as quite some Fed easing is discounted. Next week’s data to decide on next directional move.
 and Spanish (2.4%) national data published yesterday surprised slightly to the downside. Maybe there was room for the EMU figure to also touch the psychological barrier of 2%? This didn’t materialize.){kind=link}