Markets
Friday’s payrolls were soft but not that weak for markets to be sure that the Fed will start its easing cycle with a 50 bps step next week. In final comments before the start of the blackout period for Fed-communication, Fed’s Waller rubberstamped a ‘series of rate cuts’, but said to remain ‘open minded about the size and pace of rate cuts’. Given recent sharp decline in yields, investors for now don’t push for an even more aggressive positioning. Yields ‘rebounded’ off recent lows late on Friday and tried to build on that ‘correction’ today. US yields currently are gaining between 3.5 bps (2-y) and 2.0 bps (30-y). German yields add 1.0 bp (2-y) to 2.5 bps (10 & 30-y). We don’t draw any firm conclusions. Today’s correction occurs in a session deprived of any important data and intraday momentum wasn’t convincing. Yields also found some support from a slightly better risk sentiment after Friday’s post-payrolls risk-off. (Eurostoxx50 + 0.70%, S&P 500 opened 0.75% higher after a loss of 1.73% on Friday). Still, the reaction function of equities to softer data is also far from unequivocal. Sometimes (e.g. early August and to some extent last week) recession fears are seen as a negative for equites. At other moments, investors tend to embrace a substantial easing of financial conditions. Again, an inclusive story line. It’s unlikely that markets will draw a clear directional conclusion before next week’s Fed decision/policy guidance. Wednesday’s US inflation figures probably won’t decide on this topic. The focus is on growth and on the labour market. Ongoing uncertainty on global demand (cf. poor Chinese price data this morning) prevents any stained rebound in oil (currently brent $71.8 p/b).
On FX, the dollar tries a technical rebound after testing key support levels on Friday. DXY trades near 101.6 after testing the 100.50/60 area. Idem for USD/JPY (143.1) as it tries to leave the 141.70/80 area. The euro already underperformed the likes of the dollar and the yen of late and continues trading in the defensive. Europe hasn’t much to offer in a context growing uncertainy on growth. At 1.1045, EUR/USD is nearing intermediate support (1.1026 ST low). Sterling (EUR/GBP 0.8437) regains part of Friday’s risk-off loss against the euro but isn’t able to join the USD rebound (cable 1.3095), looking forward to tomorrow’s UK labour data. Despite the rebound in equities, smaller commodity related currencies or currencies sensitive to the economic cycle mostly continue trading in the defensive (AUD, NZD, but also Norwegian and the Swedish krone).
News & Views
Mario Draghi released his highly anticipated report on the state of the European economy and competitiveness. Titled “The future of European competitiveness” the former ECB chief called for a “new industrial strategy” in which the bloc invests some €800bn annually to develop its advanced technologies, boost defense and security of critical raw materials as well as create a plan to meeting its climate targets. Draghi also recommended relaxing competition rules so that policy “does not become a barrier” to the bloc’s industrial goals. Calling it an “existential challenge”, he pushed Europe to boost investment by about 5 ppts of GDP in order to transform the economy so that it can keep up with other major players including the US and China. Doing so would bring the investment-to-GDP ratio to its highest level since the seventies. The ex-ECB president argued for integrating capital markets (by centralizing market supervision) but said that the private sector is unlikely to be able to finance the whole undertaking. Public sector support is needed and he repeated a call for a common safe asset and joint EU funding to back “European public goods” such as common energy infrastructure and joint defense procurement. Draghi also favoured new levies at the EU level to finance more spending through the common budget.
The Hungarian forint underperforms its regional peers today. EUR/HUF topped the 395 barrier in the slipstream of articles flagging prime minister Orban’s intention to raise spending ahead of the 2026 elections. First reports emerged last Friday on Bloomberg and Orban himself in comments on social media yesterday appeared to confirm this, adding that he aims to achieve it while keeping public finances stable. After missing budget deficit targets multiple times, markets are skeptical that this time would be any different. Meanwhile, Orban is scouting the field for a successor to Matolcsy as head of the central bank. Finance minister Varga and economy minister Nagy have come up over the weekend as potential candidates. But neither seem to instill confidence: the former’s track record is one of long-running high deficits despite his reputation as a technocratic defender of fiscal prudence. The latter openly favours interventionist policies (both fiscal and monetary).
Graphs
EUR/HUF: forint underperforms regional peers as government is backtracking on fiscal consolidation ‘commitment’.
USD/JPY: dollar decline halts ahead of key support as markets ponder the amount and pace of Fed rate cuts.
Eurostoxx 50: correction takes a breather. Technical picture remains unconvincing.
USD/CNY: yuan declines on broader USD rebound. China deflation risks suggest ongoing yuan softness too.
 as it tries to leave the 141.70/80 area. The euro already underperformed the likes of the dollar and the yen of late and continues trading in the defensive. Europe hasn’t much to offer in a context growing uncertainy on growth.){kind=link}