Post date: 09/07/2018 10:00
Provided by Ebury
Markets worldwide decided to take a more sanguine view of the threat of a trade war among major trading partners. Stocks rose worldwide and yet US yields retreated slightly. The combination of lower US yields and increased risk appetite fuelled a rally by every major currency against the US dollar. By far the best performing currency was the Mexican Peso, up over 6% as markets put in a sell the rumour, buy the news reaction to the sweeping electoral victory of the Mexican left in last Sunday’s election.
All eyes now on the June inflation report out of the US on Thursday. The lower’than’expected wage increase from the June payroll report means that the chances of a miss vs. expectations have probably increased. The release of the minutes from the last ECB Council meeting, also on Thursday, will be the other pivotal even of the week.
Positive news from the PMI surveys of business activity and an upbeat message from Carney were both overlooked by the markets, which continue to focus on the lack of progress in the Brexit talks. Sterling moved almost tick by tick with the Euro against the US dollar, managing a nice really of well over 1% for the week.
This week will be a busy one for Sterling. Industrial production and manufacturing out on Tuesday could support Sterling if they confirm the strong streak in UK economic data.
A slow week in the Eurozone nevertheless saw significant positive surprises in German factory orders and industrial production. These data points provide further confirmation that the slowdown in Eurozone activity before the summer is a blip rather than a change in trend. ECB minutes out Thursday will shed some clarity on the Council expected timeline for hikes. Markets expect a first hike in September 2019. We are beginning to think it may come a bit earlier than that.
The payroll report for June was mixed. The headline job creation number was stronger-than-expected at 213,000 versus 195,000 consensus. It’s worth adding that May’s reading was also revised upwards. Unemployment, however, posted a surprise increase rising from 3.8% in May to 4.0% in June – but this was driven entirely buy the re-entry into the work force of more workers hopeful for a position. Wage growth decelerated from 0.3% to 0.2% on a monthly basis and rose by 2.7% YoY, which is now slightly below inflation for the first time in many years. After this miss, another disappointment in June inflation in Thursday CPI data could lead markets to revise their view of future Fed hikes and add fuel to the recent dollar selloff.