Market movers today
- Today, we have a light calendar where we mainly look out for the final euro area inflation figures at 11:00 CEST. The flash estimates showed overall HICP inflation at 1.1% y/y and core inflation at 0.9% y/y in July and we expect no revision of the data.
- Markets will continue to carefully watch tweets and communication from the US and China and, most recently, following Donald Trump's upbeat tweet this weekend.
- Later this week , we have the important US manufacturing PMI, which we expect to tick below 50 (however, we note upside risks from strong regional PMIs last week). We also have minutes from both the Fed and ECB meetings in July and the Jackson Hole Conference (Powell speaks on Friday). We also get euro area PMIs.
- In the Nordic area, Swedish unemployment figures and the Norwegian investment survey are the most important itemsthis week.
- The ECB is widely expected to announce a tiering system while cutting rates at the next meeting in September. We have taken a closer look, see ECB: Mitigating side effects - gauging the tiering premium , 16 August.
Selected market news
Risk appetite has improved this morning. Many Asian stock indices, the US S&P500 futures, oil and US 10-year Treasury yield are all up. Yesterday, US President Trump tweeted that "We are doing very well with China, and talking ". It seems like investors have to accept that Trump is going intervene in the trade war by tweeting from time to time. Apparently, more US-China teleconferences are planned over the next two weeks. Still, we are having a hard time seeing a trade deal on this side of the presidential elections.
In Germany, Finance Minister Ola Scholz hinted at a EUR50bn (~1.5% of German nominal GDP) fiscal spending package in case of recession, although it is not imminent , see Bloomberg . The German government is under heavy pressure by many to ease fiscal policy, as the German economy is struggling (contracted in Q2) and there is a lack of safe assets (bonds) in the market. See also Harr's view: Why Germany should ease fiscal policy , 18 August. Unfortunately, the fact that Scholz says a package is not imminent also highlights the time lag problem with fiscal policy: It takes time for politicians to recognise the need for fiscal easing and vote in favour of a specific package, and hence when it has an impact on real activity.
The Iranian supertanker that was detained last month, has left Gibraltar waters despite the US's objections.
Ahead of Boris Johnson's visit to Angela Merkel and Emmanuel Macron, a government report on the worst-case impact on the British economy in case of a no deal Brexit was leaked to the press yesterday. It is grim reading suggesting the UK is definitely not ready for a no deal Brexit, see BBC . While the government says that is why it is stepping up no deal preparations, it also highlights the risk of the new government's strategy.
Scandi markets
No important Scandi releases today.
Fixed income markets
After a strong FI rally earlier in the week, US yields edged higher into Friday’s close as risk appetite got a boost from the news that the US-China talks will proceed as planned and not least as it was revealed that the US Treasury was seeking feedback on ultra-long issuance. The 10-30y bear steepened by 3bp and 30Y Treasury yields rose to 2.04% after trading as low as 1.91% the day before.
This week, the EGB market will also focus on the long end as the German Finanzagentur comes to the market with a new 30Y bund on Wednesday. We take a closer look at the new 30Y in Government Bonds Weekly. We recommend going long the new 30Y bund versus swaps as the 30Y segment is the only segment of the German curve relative to the swapcurve. A fair pricing for the new 30Y Bund is a spread of 3-4bp to Bund 1.25% 08/48 or 29-30bp to mid-swaps (based on pricing on Friday afternoon).
Note that on Friday we updated our Fed call. We now expect five consecutive rate cuts and that 10Y US treasury yields will drop to 1% over the next six months, see FOMC research: New Fed call: Five more from Fed, 16 August.
Please see our comprehensive note on an ECB tiering system, see ECB: Mitigating side effects – gauging the tiering premium, 16 August.
FX markets
EUR/USD declined last week and ended the week below the 1.11 mark - and we see no obvious triggers for a rebound near term. Preliminary PMIs this week will probably only have limited impact and ECB and FOMC minutes are not likely to put their mark on the market for long. First, we think the current ECB pricing, the likely ‘tiered ECB cut’, is too aggressive. Second, although our new Fed call suggests five more cuts (slightly more aggressive than market pricing), the Fed looks unlikely to accommodate the market’s call for larger rate cuts and we will likely need to get deeper into the easing cycle before we see a more broad-based USD weakness. Meanwhile, speculation over whether the Trump administration could look to FX intervention remains after the recent labelling of China as a currency manipulator: China has said it will not use the CNY as a tool in the trade war, and given further Fed easing down the road, we do not see any arguments for the US to officially abandon the strong dollar policy at this stage. USD/JPY and EUR/CHF have settled at their newfound lows but we would not rule out further drops as the global economic cycle will likely take another turn lower near term.
EUR/GBP has come off its post-Johnson highs but it is, in our view, too early for a firm rebound in the GBP; until we get closer to the 31 October Brexit deadline, the market is unlikely to get its hopes up too high for an extension to avert a ‘no deal’. In the Scandies, global risk sentiment is likely to remain in the driver’s seat. Last week’s Norges Bank meeting was no game changer for the NOK as the hiking bias remained amid rising worries over the global picture. This week’s oil investment survey will probably confirm that the sector is set to continue to boost the economy this year and next – but it is unlikely to prove a turning point for the battered NOK that much in the current fragile global environment. We keep a neutral view on EUR/NOK for now. For the SEK, we believe it is only a matter of time before the Riksbank decides to postpone the next hike well into next year - a shift it could make already at the September meeting. However, in light of the already relatively soft pricing on the Riksbank, which in our view is justified, such a decision may not lead to any significant rally in EUR/SEK.
Key figures and events
Market movers today
- Today, we have a light calendar where we mainly look out for the final euro area inflation figures at 11:00 CEST. The flash estimates showed overall HICP inflation at 1.1% y/y and core inflation at 0.9% y/y in July and we expect no revision of the data.
- Markets will continue to carefully watch tweets and communication from the US and China and, most recently, following Donald Trump's upbeat tweet this weekend.
- Later this week , we have the important US manufacturing PMI, which we expect to tick below 50 (however, we note upside risks from strong regional PMIs last week). We also have minutes from both the Fed and ECB meetings in July and the Jackson Hole Conference (Powell speaks on Friday). We also get euro area PMIs.
- In the Nordic area, Swedish unemployment figures and the Norwegian investment survey are the most important itemsthis week.
- The ECB is widely expected to announce a tiering system while cutting rates at the next meeting in September. We have taken a closer look, see ECB: Mitigating side effects - gauging the tiering premium , 16 August.
Selected market news
Risk appetite has improved this morning. Many Asian stock indices, the US S&P500 futures, oil and US 10-year Treasury yield are all up. Yesterday, US President Trump tweeted that "We are doing very well with China, and talking ". It seems like investors have to accept that Trump is going intervene in the trade war by tweeting from time to time. Apparently, more US-China teleconferences are planned over the next two weeks. Still, we are having a hard time seeing a trade deal on this side of the presidential elections.
In Germany, Finance Minister Ola Scholz hinted at a EUR50bn (~1.5% of German nominal GDP) fiscal spending package in case of recession, although it is not imminent , see Bloomberg . The German government is under heavy pressure by many to ease fiscal policy, as the German economy is struggling (contracted in Q2) and there is a lack of safe assets (bonds) in the market. See also Harr's view: Why Germany should ease fiscal policy , 18 August. Unfortunately, the fact that Scholz says a package is not imminent also highlights the time lag problem with fiscal policy: It takes time for politicians to recognise the need for fiscal easing and vote in favour of a specific package, and hence when it has an impact on real activity.
The Iranian supertanker that was detained last month, has left Gibraltar waters despite the US's objections.