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The Price Action Was Slightly Disappointing For Bond Bears


On Friday, core bonds ended the day mixed to slightly stronger. German yields were little changed, despite disappointing French Q2 growth. The focus for core bond trading was on the US Q2 GDP. The US economy expanded 4.1% QoQ (annualized), close to expectations (4.2%). The details of the Q2 report were constructive, too. Even so, it failed to inspire any further rise in US yields. On the contrary, US yields declined up to 2 bp, with the 2-10-yr part of the curve showing a slight flattening. Markets already expected strong growth. Most price indicators of the report (including the core PCE deflator) remained rather soft. A risk-off correction on US equity markets also added to a bond friendly sentiment. US yields declined between 2.1 bp (10-y) and 1.2 bp (2-y).

Today, the EMU calendar is interesting with EC confidence data and the German July CPI. German HICP is expected to rise 0.4% M/M and 2.1% Y/Y. Markets will also look forward to several key events/data later this week. The BOJ (tomorrow), the Fed (Wednesday ) and the Bank of England (Thursday) will announce policy decisions. Markets are pondering whether the BOJ will fine-tune its policy, mainly to mitigate side effects. The Fed is expected to leave its policy rate unchanged, but markets will look for clues whether the scenario of two additional rate hikes is still viable. The BoE is expected to raise rates by 25 bp. At the end of the week, key US data including the US payrolls will be published. The price action Friday was slightly disappointing for bond bears. The report suggests that upcoming US eco data should be really strong to inspire a sustained (further) rise in yields. Given this morning’s risk-off sentiment in Asia core bonds might remain well supported at the start of this week. For now, at test/re-break of the 3.0% level for US 10-year yields doesn’t look that easy.

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The US Q2 GDP was also not strong enough to inspire further USD gains. EUR/USD first traded with a negative bias changing hands in the 1.1625 area just before the GDP release. However, the dollar faced some kind of modest ‘buy-the rumour sell, sell the fact’ reaction after the publication. EUR/USD closed the session at 1.1657 (from 1.1643). USD/JPY also finished the session slightly softer at 111.05. Some caution on yen shorts ahead of the BOJ and a correction on the equity markets weighed slightly USD/JPY, too. This morning sentiment on risk remains modestly risk-off in Asia. However, both EUR/USD and USD/JPY are trading near Friday’s closing levels. Friday’s price action was also slightly disappointing for USD bulls. The dollar needs positive surprises to succeed any further sustained gains. EUR/USD is holding firmly within the 1.15/1.1850 trading range. Friday’s price action suggests that a downside break also won’t be evident. For now there is no sign of a directional break out of the mentioned range.

Sterling even finished the day slightly softer with EUR/GBP closing just below 0.89. The EU rejecting PM May’s proposal on the customs issue didn’t help sterling. Today, the UK monetary data are on the agenda. Later this week, the focus will turn to the BoE policy decision. A rate hike is more or less discounted. Carney and Co will probably stay cautious on any additional rate hikes. We don’t see much reason for a sustained GBP-comeback.

News Headlines

US president Donald Trump has threatened to shut down the government if Democrats do not back his border wall funding (to build that wall on the US-Mexican border) and back immigration law changes. While the big majority of Republicans is backing Trump on the ideas, they do not favor a government shutdown.

After investors were disappointed with the results of Facebook and Twitter last week, plunging their shares, market sentiment worsened (NASDAQ -1.46% on Friday). Asian markets continue this sentiment with all indices opening in red today. The Chinese Shenzhen Comp is outperforming with a 1.25% loss.

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