Yesterday, core bonds were supported by a safe haven bid as investors pondered the consequences of China and the US exchanging a new series of mutual threats in the trade conflict. US equities show resilient to the trade headlines, but other markets of risky assets are feeling bigger headwinds. US yields declined 1-2 bp across the curve, reversing part of Wednesday’s rise. German bunds showed a similar picture. Intraday EMU spreads increased, both on the global risk-off trade and on country specific issues (Italy). This morning, the US 10-y Note future is trading little changed. Sentiment in Asian remains fragile. Equities are trading mixed with China still underperforming. Later today, final EMU PMI’s and EMU June retail sales will be published, but the focus will be on the US payrolls. US job growth is expected to ease slightly to a still solid 193.000. The unemployment rate is expected at 3.9%. Wage growth (AHE) will probably be the key feature for markets, expected at 0.3% M/M and 2.7% Y/Y (unchanged). Of late, core (US) yields rebounded slightly. However, a positive surprise in wages is probably needed for yields to hold their upward momentum. The trade war remains a wildcard. The US non-manufacturing ISM remains interesting, too. A modest setback is expected (from 59.1 to 58.6). Whatever the outcome of the data, we keep an eye at the Bund contract. The technical picture showed some cracks of late and yesterday’s rebound wasn’t that convincing.
Yesterday, the dollar profited from the lingering global uncertainty mainly caused by the US China trade dispute. The trade-weighted dollar (DXY) rebounded north of 95. USD/JPY showed no clear trend and close the session little changed at 111.66. Today, global risk sentiment and the US payrolls will also be the key driver for USD trading. This morning, USD/CNY set a new MT peak, keeping the dollar strong in most other cross rates. The US payrolls are expected to remain solid. However, even good US eco news recently was no guarantee for a sustained rise in US yields and/or the dollar. We look out whether the market reaction will be different today. Key USD resistance is seen at 95.65 (DXY) and at EU5/USD 1.1510. A test is possible, but established USD ranges proved to be very tough to break of late. Softer than expected payrolls will probably solidify the established ranges.
Yesterday, sterling profited temporarily as the BOE unanimously voted to raise rates by 25 bp. The BOE indicated that some modest further tightening might be needed to bring inflation back to target over the policy horizon. However, BoE’s Carney said the ‘BoE will walk, not run’. Brexit remains a source of uncertainty. EUR/GBP spiked temporarily below 0.89, but the UK currency couldn’t maintain the initial gain and rebounded north of 0.89. Today, the UK services PMI is expected to ease from 55.1 to 54.7. We have no reason to take a different view from the consensus. However, yesterday’s price action suggests that sterling remains vulnerable in case of bad news.
French President Emmanuel Macron is meeting British Prime Minister Therese May today. May is seeking support for a pro-jobs trade deal that got rejected on key elements by EU negotiator Barnier last week. However, Macron confirmed the talks will be informal and that he’s fully supporting Barnier in the brexit negotiations. With brexit coming closer, a survey showed that less than a third of UK business leaders has carried out contingency planning for its country to leave the European Union. Most leaders indicated that it is very hard to know what to plan for and when. They urge PM May to speed up publication of the technical notes.
The United States has reason to believe that Iran has started carrying out naval exercises in the Gulf, moving up the timing of annual drills amid heightened tensions with the US. Iran has been furious over Trump’s decision to pull out of an international nuclear deal and re-impose sanctions on the country.
Mexico’s central bank held its benchmark rate steady at 7.75% and said risks to growth were shifting downward. They expect the economy to grow 2 to 2.5% this year and vowed to maintain a prudent policy stance due to risks to inflation (4.65% last month, annualized).