European Outlook: European bond markets, which were pretty static during the AM session have livened up a bit in the afternoon and Bund yields recovered losses and moved higher, with futures heading south in tandem with EURUSD. The 10-year yield is up 1.8 bp on the day at 14.57 GMT reached an intraday high of 1.73% after the EUR retreated and fell back below EUR 1.18 against the dollar. Low volumes over the summer also means the ECB is curbing its QE purchases in order to limit market distortions, but quiet trading conditions can also distort moves. German export and import growth disappointed. Like yesterday’s production numbers then the data point to a robust Q2 GDP growth rate, with net exports underpinning the German recovery, which orders suggest remains on track in the third quarter, even if automaker’s woes and the strong EUR are seeing investors turning cautious on German stocks.U.K. retail sales were strong in July, according to the British Retail Consortium (BRC).The BRC expressed some caution, noting a “shrinking pool of discretionary consumer spending power,” highlighting the negative real income trend, which was mentioned as a concern in the BoE’s guidance last week. Elsewhere Swiss unemployment held steady at a seasonally adjusted 3.2% as expected.
FX Update: A risk-off sentiment supported the yen and Swiss franc as safe haven currencies and assets came into demand amid an escalation in threatening rhetoric between North Korea and the U.S, with Trump promising Pyongyang “fire and fury.” North Korea’s development of nuclear warhead carrying ICBM capability is the issue, and the flare up in tensions rattled stock markets across the Asia-Pacific region. USDJPY dove to a seven-week low at 109.74, and EURJPY and other yen crosses also declined sharply The biggest mover among the main currencies was AUDJPY, which dove over 0.7%, with the relatively high beta Aussie buck underperforming amid the risk-off sentiment. Market participants will be monitoring the geopolitical situation closely in the days ahead. Normally tensions stemming from North Korea’s antics tend to simmer down quickly, though the stakes seem to have increased as the rouge nation draws near to developing a credible nuclear weapon threat. Elsewhere in the currency market, EURCHF backtracked by over 0.5%, unwinding some of its recent gains and revealing that the franc still has vestiges of a safe haven currency. EURUSD logged a 12-day low at 1.1725, extending the correction that’s been in play since last week’s solid U.S. jobs report, which has fuelled market expectations for the Fed to conduct a quantitative tightening as soon as next month.
U.S. reports: revealed U.S. JOLTS surged 461k to 6,163k in June, a record high level, after falling 265k in May to 5,702k. The rate climbed to 4.0% from 3.8%. Hirings dropped 103k to 5,356k after rebounding 416k previously, with the rate holding steady at 3.7%. Quitters, a favorite stat of Fed chair Yellen, slid 72k in June following May’s 162k increase. The quit rate dipped to 2.1% from 2.2%. The strength in the headline job openings component is good news, and is consistent with much of the other labor market data. And though the slip in the quit number is a little disappointing, it’s been on a choppy course most of the year. U.S. NFIB small business optimism index rose 1.5 points to 105.2 in July, rebounding from June’s 0.9 point drop to 103.6. This was the highest reading since hitting 105.3 in February. Gains were broad-based with 9 of the 13 indicators improving, 3 declined and 1 was unchanged. The data are a little better than expected, as has been the case for several other July sentiment reading.
Main Macro Events Today
- CAD Housing starts – July housing starts are expected to fall to 200.0k unit rate in July from the 212.7k pace in June. The roust 252k pace in March was the best reading since the 2008-09 recession, and the strongest since the 288.6k rate in September of 2007. Building permit values are also due today, with a 5.0% decline projected for June.
- US Productivity – The preliminary report on Q2 productivity will be out and should post a 0.7% headline, above the flat pace in Q1 but below the 1.8% headline of 16Q4. Unit labor costs are expected to be up 1.2% from 2.2% in Q1 and -4.6% in Q4.
- RBNZ – The Reserve Bank of New Zealand’s is going to meet today, to announce their decision on interest rates, publish Monetary Policy Statement and to comment on the current economic situation. No change to the current 1.75% rate setting, expected through year-end. Governor Wheeler holds his usual press conference after the announcement.
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