The Greek God of fear, Phobos, took a stroll through financial markets yesterday. The risk-off mood swelled as the most important part of the US yield curve inverted for the first time since 2007 and USD dominated the G10 currency board together with haven currencies JPY and CHF. Markets bathed in worries after the German economy shrank and Chinese Retail Sales and Industrial Output data missed estimates. Additionally, the latest conciliatory tones by the US on trade sounded more hollow in the echo than they appeared on the first reception. President Trump revealed the latest signs of appeasement in trade was driven by the aim to protect the affordability of Christmas gifts, not by a sudden appreciation for China’s trade policies. For now, USD benefits of its status as haven currency. However, if a US recession as suggested by the inverted yield curve materialises, the greenback may start reversing gains, especially against EUR. FX markets will be no place for the idle today, again, as this afternoon brings us Retail Sales, the Philly Fed Manufacturing Index and Preliminary Quarterly Unit Labour Costs at 13:30 BST. Afterwards, we have the Capacity Utilisation Rate and Industrial Production at 14:15, while we remain vigilant throughout the day for further developments on trade and on the yield curve.
Sterling was one of the surprising top performers yesterday, as a higher inflation reading than expected was seen as boosting the chances the Bank of England will need to tighten monetary policy in the not-so-distant future. The July Consumer Price Index increased faster than expected at 2.1% (consensus: 1.9%), with core CPI climbing to 1.9%. Political newsflow remains eventful with Labour leader Jeremy Corbyn reaching out to other opposition parties to form a Unity Government and avoid no-deal Brexit. His plan is to table a vote of no confidence and lead a caretaker government that can request an extension of Article 50 with the intention of holding general elections later. As Corbyn gets ready for his coup, cunning plans are being forged in the heat of the Brexit fire elsewhere. The Chairman Parliament’s Foreign Affair Committee, Tom Tuggendham, suggests the Prime Minister can take the UK out of the EU in a surprise move within 10 days, outwitting Corbyn’s no-deal prevention intentions. Whatever the weather, it seems like it’s going to be a hot end to summer in Westminster, which is exactly the theme that may overshadow the Retail Sales release today at 9:30 BST.
EUR weakened for the second day in a row against the US dollar after Flash German Q2 Gross Domestic Product data showed a contraction. Q2 German GDP declined by 0.1%, driven by a drop in capital expenditures. Eurozone Q2 growth was confirmed at 0.2% in its second reading, with M1 money supply growth suggesting Q3 growth may pick up to 0.3%. However, early economic indicators are quite downbeat about Q3, which suggest 0.3% growth may be over-optimistic for the European bloc. Today is a bank holiday in France, Italy and Spain, which may cause thin market liquidity and thus more unexpected volatility.
The loonie suffered yesterday from its sensitivity to global risk sentiments, as Murphy’s law – everything that can go wrong, will go wrong – was front of mind. Weak Chinese and German data, together with escalating trade tensions failed to help the loonie directly, nor indirectly through oil prices, as WTI oil prices plummeted by around 3.5% on the day. Today at 13:30 BST ADP Non-Farm Employment Change will be released.