The Curve Showed A Slight Bear Flattening

Markets

Yesterday, changes in US yields were limited (about 1 bp or less). The curve showed a slight bear flattening. US data were OK, leaving market expectations for a 4% + Q2 GDP growth intact. European yields declined slightly during the ECB press conference. ECB’s Draghi maintained a positive tone on the EMU economy, despite the potential negative impact of trade tensions. The ECB also confirmed its ‘Through Summer 2019 commitment’, suggesting that a rate hike is more likely after summer next year than earlier. Draghi also said that the ECB didn’t discuss the reinvestment policy. After a first soft reaction, European yields reversed part of the initial decline, with the 30 year slightly underperforming, probably due to the lack of new info on the ECB reinvestment policy (no confirmation on a lengthening of maturities). This morning, the BOJ offered to buy 10-y bonds at a yield of 0.1% after the interest moved temporary above this level. Japanese yields rose this week as markets speculate that the BOJ might amend its policy at next week’s meeting. Tokyo July inflation was slightly higher than expected at 0.9% Y/Y (0.5% core), but price rises remain very far away from the BOJ’s 2% target. Later today, the market focus will turn to the first estimate of US Q2 GDP growth. Solid growth of 4.2% Q/Q annualized is expected. So, the reference is already high. Even so, a figure near (or above consensus) might reinforce expectations that there is no reason for the Fed to slow the pace of quarterly rate hikes. Such a scenario should at least put a floor for US yields. The US 10-y yields might revisit/surpass the 3.0% barrier. A breach of this level might bring the cycle top (3.12%) again on the radar.

Yesterday, EUR/USD failed to sustain the gains recorded after the Trump-Juncker agreement on trade on Wednesday evening. The pair already lost some ground during the morning session. The decline accelerated during/after the ECB press conference as markets concluded that the ECB maintains a scenario of a rate hike only at the end of the Summer of 2019. The pair closed at 1.1643. USD/JPY succeeded a cautious intraday rebound (close at 111.23). This morning, the BOJ capped the rise in (10-y) yields. This move also blocked a further rise of the yen. USD/JPY stays in wait-and-see modus (111 area). Later today, the US Q2 GDP report will probably also be the key factor for USD trading. A strong report is already expected. Even so, 4% + growth might still reinforce the idea of ongoing policy divergence between the US and the EMU. Yesterday morning’s price action (after the Turmp-Juncker agreement) was also slightly disappointing from a euro point of view and suggests that the topside of the EUR/USD 1.15/1.1850 range is rather well protected. So, EUR/USD might still drift somewhat lower in this range. Strong growth in theory should also be positive for USD/JPY. However, the market reaction might be guarded ahead of next week’s BOJ meeting.

Yesterday, EUR/GBP hovered in the high 0.88 area. Sterling reversed a slight intraday gain after EU’s Barnier indicated that the EU couldn’t agree with the PM May’s new customs proposal. Today, there are again no UK eco data. So sterling traders will probably have to look for guidance from the broader euro and dollar moves.

News Headlines

China’s industrial profit growth slowed down to 20% in June, from 21.1% in May, due to a slowdown in factory production and China’s efforts to cut pollution and debt. Overnight, however, the IMF confirmed that the Chinese economy continues to perform strongly with growth expected at 6.6% this year, from 6.9% growth last year.

Leaders of the BRICS bloc have signed a declaration supporting an open and inclusive multilateral trading system under WTO rules, after a summit held in South Africa yesterday. The bloc wants to avoid escalating trade tensions to derail a global upswing that is already losing momentum.

Tokyo’s core consumer prices, a leading indicator for the nation, rose for a second time in a row to 0.8% in July from a year earlier, while 0,7% was expected. The acceleration, however, is still far from the Bank of Japan’s 2% inflation target who is said considering to tweak its policy framework at next week’s BOJ meeting.