Rates as of 05:15 GMT

Market Recap

A much calmer day yesterday, with few major moves in the market. The big exception was AUD, which gained significantly. I have to admit, I’m stumped to explain this with regards to any change in the fundamental picture. The currency didn’t move that much when the news of a record trade surplus came out yesterday morning Australian time. Then around 09:40 GMT, with no news that I could find, it suddenly jumped up. Nor was that a USD move, because AUD/NZD moved up at about the same time (although later fell back). AUD continued climbing for the rest of the European day, and has been relatively flat ever since. News this morning in Australian time that job vacancies fell sharply (-1.1% qoq vs +1.2% the previous quarter; no forecast available) and retail sales disappointed (+0.1% mom vs +0.2% mom expected) didn’t make any dent in the currency – in fact, it popped up when the news came out, although it quickly fell back. And iron ore was down 4.1% today, another significant negative for the currency.

I can only figure two things: 1) a general “risk on” mood as the S&P 500 moved further into record territory and most Asian stock markets continued to gain. That would explain why NZD and CAD were up too, and JPY and CHF were down. And 2) reassessment of the likely RBA’s likely path. The odds of the RBA’s cash rate ending the year at 0.75% -- only one more cut – have been increasing, while the odds of it ending at 0.50% or lower – two or more cuts – has been falling. That may give some support to AUD, particularly as the market prices in rate cuts by the Fed.

On the other hand, I’m surprised that GBP has been as steady as it was. Yesterday’s UK service-sector PMI fell to 50.2 (vs 51.0 expected, also 51.0 previously). That brought the composite PMI down to 49.7 – contractionary territory -- from 50.9. This is the first below-50 reading since July 2016, which if you remember was right after the Brexit referendum. This has started more and more talk about a recession in Britain, which would mean the Bank of England would no doubt change its view that “an ongoing tightening of monetary policy over the forecast period” will be necessary. GBP negative

Weaker-than-expected US data didn’t hurt USD much. The ADP employment report came in at 102k vs 140k expected; the ISM non-manufacturing index fell to 55.1 vs 56.0 expected (56.9 previous); and the US trade deficit widened more than expected to $55.5bn from $51.2bn ($54.0bn expected). Yet overall the dollar was little changed. My guess is that rate cuts are already priced into the USD, so any news that would confirm the idea doesn’t have much of an impact on the currency.

The dollar may also be benefiting from the enormous rally in European bonds, which may restore some of the lost attractiveness of US bonds.

Italian 10-year bond yields fell about 26 bps yesterday after the European Commission said they wouldn’t discipline the country over its budget. (In fact, Italian 2-year yields are actually negative!) Italy’s spread over Germany is now back below 200 bps for the first time in over a year.

The rally isn’t confined to Italy by any means, however. Greek bond yields have been plunging as well. Greek 10-year yields are now 2.06%, not far off US Treasuries (1.95%). The yield dropped below 2.0% at one point yesterday for the first time ever!

Ten-year yields in many countries are now below or just a bit above their central bank’s policy rate. That’s definitely the case in the US (1.95% vs 2.40%) but also in the UK (0.69% vs 0.75%), Japan (-0.16% vs -0.10%) and Canada (1.44% vs 1.75%). In Germany, 10-year yields are -0.39% vs the ECB’s depo rate of -0.40%. Either the bond markets are terribly, terribly wrong or central banks around the world are likely to cut their rates.

Today’s market

Well, it’s my national holiday today so I guess I get a day off! No indicators out today, neither during the European nor US days nor overnight.

The next thing up is tomorrow’s German factory orders, which technically aren’t part of Thursdays’ data, but I include them here because they’re likely to be released before I’ve shaken off my downy sleep, death’s counterfeit, and sent out my morning report. The figures are expected to be miserable. Need I say more? What indicator out of Europe isn’t miserable nowadays? Let’s start with the weather report. Hot, hotter, hottest recorded temperature in history. Maybe industrial production, which includes electricity generation, will pick up when the June figure is released.

But until then, factory orders are showing no sign of picking up. Over the last six months they’ve averaged -0.8% mom, and this month are expected to be down 0.2% mom – I guess that’s a bit better than average, but it’s not enough to lift the yoy growth rate.

Of course this shouldn’t surprise anyone, since it’s quite in line with what the purchasing managers’ index (PMI) says, and we have that out to June already. No rebound is likely for some time. EUR negative, unless of course it’s so fully expected that no one bothers to react.

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Marshall Gittler

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