- European equities lost up to 0.5% today, despite strong EMU eco data. US equities join the setback in Asia and in Europe. Major US indices show losses of 0.3%-0.4%.
- One of the Federal Reserve’s leading doves and 2017 voting member, Dallas Fed Kaplan told the FT he is "actively considering" backing another increase in short-term interest rates at the central bank’s meeting next month, pointing to the risks that an overheating job market will create "imbalances and excesses" in financial markets.
- The German (0.8% Q/Q) and Italian (0.5% Q/Q) economies moved up a gear in the third quarter, aided by an increase in demand for their exports, as the Eurozone’s economy (0.6% Q/Q & 2.5% Y/Y) remained on course for its strongest year since 2007. Central and eastern Europe’s economies also kicked into higher gear with forecast-beating growth, as manufacturers thrived and tightening labour markets boosted wages and consumer spending.
- Inflation in the UK remained steady at its highest level in more than five years in October (3% Y/Y), but was lower than expected by economists who had forecast a further rise (3.1% Y/Y). Rising food prices had been offset by a fall in the cost of fuel. The pound slipped after the data with EUR/GBP moving above 0.8950.
- Four of the world’s top central bankers – ECB Draghi, Fed Yellen, BoE Carney and BoJ Kuroda – promised to keep openly guiding investors about future policy moves as they slowly withdraw the huge monetary stimulus rolled out during the financial crisis.
- Swedish inflation slowed more than forecast in October (from 2.3% Y/Y to 1.8% Y/y, vs 2.0% Y/Y expected) and dropped below the 2% inflation target for the first time since June. The Swedish krona lost significant ground with EUR/SEK bursting through 9.8 resistance.
- Eurozone industrial production declined in line with forecasts from 1.4% Y/Y to -0.6% Y/Y. German ZEW investor sentiment remained strong with the headline index rising from 87 to 88.8 in November, the highest level since mid 2011. The forward looking expectations component rose less than forecast, from 17.6 to 18.7.
- US PPI final demand PPI rose 0.4% M/M and 2.8% Y/Y in October, significantly more than expected. Core PPI indicators painted a similar picture. Part of the rise in wholesale prices might by due to storm-related activity. In this respect, markets will be keen the see whether US October CPI (to be published tomorrow) will show a similar picture.
Rates
Core bonds hold strong despite stronger eco data
Traditional correlations remain at search on bond markets. The past days, Bunds and US Treasuries lost ground despite weakness on stock markets. Today, global core bonds gain slightly ground despite stronger than expected EMU and US eco data. Especially Q3 GDP data (0.6% Q/Q confirmation for the euro zone, but strong German/Italian readings) and US PPI (2.8% Y/Y and significantly beating forecasts) drew attention. The heads of the 4 largest central banks vowed to keep openly guiding investors about future policy moves, but didn’t touch on their own current stances. Several Fed governors took parole as well with dovish Dallas Fed Kaplan, 2017 voter, arguing in favour of a December rate hike. Chicago Fed Evans repeated a recent call from SF Fed Williams to allow price level targeting in the future, allowing a temporary overshoot in inflation. St-Louis Fed Bullard, arch dove, repeated that he’s in favour of keeping rates unchanged at least until inflation passes the 2% target.
At the time of writing, the German yield curve bull flattens with yields 0.1 bp (2-yr) to 1 bp (30-yr) lower. The US yield curve flattens as well with yield changes ranging between +0.6 bps (2-yr) and -2.3 bps (30-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany narrow up to 3 bps (Portugal) with Greece underperforming (+3 bps).
The Dutch debt agency held a 10-yr DSL auction (€2.5bn 0.75% Jul2027). The amount sold was below the maximum on offer (€3 bn), but that’s often the case at Dutch auctions. The German Finanzagentur successfully sold a new 2-yr Schatz (€5 bn 0% Dec2019). Total bids amounted to €6.14 bn, above the €5.31 bn at the previous 4 Schatz auctions. The Bundesbank retained €0.99 bn for secondary market operations, resulting in an official bid cover of 1.5 (real bid cover 1.2). The auction had a tiny tail and the auction yield was close to the one at the previous 4 auctions (-0.71%).
Currencies
EUR/USD jumps on strong German Q3 GDP
Euro strength was the name of the game today.A very strong Q3 German GDP propelled the single currency higher. Other EMU eco data confirmed the health of the EMU economy. Remarkably, there was again a disconnect with the price moves in interest rate markets. On the other hand, the dollar didn’t profit from higher than expected US PPI data. EUR/USD cleared the 1.1690 resistance and trades currently in the 1.1750 area. USD/JPY holds in the mid 113 area.
Asian equities mostly traded in negative territory. Japan this time was the exception to the rule. Chinese retail sales and production data were a touch softer than expected. USD/JPY held in the 113.60 area after yesterday’s intraday rebound. Changes in EUR/USD (1.1675) were also small, but the pair neared 1.1690 resistance.
At the start of the European session, German Q3 GDP printed very strong at 0.8% Q/Q and 2.8% Y/Y (0.6% Q/Q and 2.3% Y/Y was expected). The unexpectedly strong Q3 German growth marked the start of a protracted intraday euro rebound. Later in the session, German ZEW, Italian Q3 growth and EMU Q3 growth also confirmed the health of the EMU economy . EUR/USD cleared 1.1690 resistance and extended gains well north of 1.17. Remarkably, only the euro reacted to the strong EMU data. European equities lost slightly ground. Even stranger, the Bund, which lost ground in a risk-off environment of late, regained a few ticks despite strong EMU data. Changes in interest rate differentials were also limited and didn’t really explain the power of the intraday euro rally . EUR/USD traded in the 1.1750 area going into the US PPI report. USD/JPY was little changed, in line with equities and core yields.
US headline PPI (0.4% M/M and 2.8% Y/Y ) was significantly stronger than expected (consensus 0.1% M/M and 2.4% Y/Y). US yields and the dollar tried a shy attempt to go higher, but the rise almost immediately ran into resistance. Today’s price action confirmed the tentative signs of early this week. The dollar fails to profit from data/events that were often USD supportive in the past. At the same time, the euro remains well bid even as the ECB signalled that further policy normalisation is still quite far away.
Today’s price action is disappointing for USD bulls. That said we assume that the current disconnect between bond markets and FX won’t last indefinitely. In this respect we look out whether tomorrow’s US CPI will be able to change fortunes for the dollar. EUR/USD trades currently in the 1.1750 area. USD/JPY is little changed in the mid 113 area.
EUR/GBP rises on sterling weakness AND euro strength
The focus for sterling trading turned from politics/Brexit to the UK eco data today. UK headline inflation stabilised at 3.0%M Y/Y (consensus 3.1% Y/Y). Other price indicators (core inflation, PPI) were also slightly softer than expected. In its November inflation report, the BoE assumed inflation to peak above 3.0% in October. Inflation might cool from here as the upward impact of the decline of sterling on ‘end-prices’ will gradually decline. If inflation cools from current levels, the BoE can shift into wait-and-see modus. Sterling won’t get any additional interest rate support anytime soon. Some market observers even question the need of the November rate hike. Sterling lost further ground after the price data. Cable dropped (temporary?) below 1.31, but the downside was blocked on USD weakness. EUR/GBP extended gains well north of 0.89 (currently 0.8970). This move was reinforced by overall euro gains after strong German/EMU eco data this morning.
