News & Analysis


Wednesday’s trading was similar to the day before, with US data giving traders a reason to trim back some of the loonie’s losses. Both GDP growth and PCE inflation numbers saw downward revisions in their second estimates for Q2, leading markets to further cement the idea that the Fed will skip a hike in September. The ensuing risk rally and dollar pullback led the loonie to gain another two tenths of a percent, and unlike on Tuesday, the Canadian currency sat in the middle of the G10 currency board. After a long wait, the Canadian data calendar finally has something to offer us today, with SEPH employment for June and the current account balance for Q2 on deck. Unfortunately, neither release is particularly watched by markets. The big day will be Friday, when we receive quarterly GDP figures for Q2 and monthly GDP for June (plus an advance reading for July).


US data once again gripped the market’s focus yesterday, and for good reason. The ADP measure of private employment came in below expectations at 177k, but was completely discounted by traders given its horrendous track record at predicting official payrolls since last summer’s methodological update, which ironically was conducted to closer align it with the BLS measure of employment. Instead it was the second reading of Q2 GDP that rocked markets, largely because it took some of the shine off of the US exceptionalism narrative. Growth was downgraded by 0.3 percentage points to 2.1% QoQ annualised, largely due to downgrades in inventories and net trade while personal consumption was bumped up slightly to 1.7%. Although the composition of the second reading was stronger, the overall downgrade to the GDP estimate follows a string of softening data and as a result weighed on the US exceptionalism story and US rates. The bull steepening in the Treasury curve, for the second session this week, helped to once again stimulate a risk rally in FX markets, this time with GBP, SEK and EUR leading gains against the greenback.

While markets are adjusting to a world where US growth doesn’t look too far out of kilter with other developed markets, but remains a far stretch away from reigniting imminent recession fears, they are also having to factor in a potential trough in China’s manufacturing decline. Official PMIs out of China for August this morning showed that the slowdown in the services expansion continued at a faster pace than expected, with the measure printing 0.2 points below expectations at 51.0, however, this was more than offset by a stronger manufacturing figure, which at 49.7 suggests the bulk of the contraction in the sector may now be in the rearview mirror. Although we are hesitant to draw too many inferences from the PMI data, such as the effectiveness of support measures announced over the past 3 months in stemming the overall growth slowdown, we do note that the stronger composite PMI number out of China, and weaker US GDP figure, presents the first signs that the macro backdrop markets have become accustomed to trading over the summer months may now start showing signs of shifting. Today, July’s real personal spending data in the PCE report will be viewed with this in mind. The median economist estimate supplied to Bloomberg looks for an uptick in the rate of consumption from 0.4% to 0.5%. If met, this should keep traders wary of pricing out too much in the US rates curve, however, if the data surprises to the downside, another bull steepening in the Treasury curve and leg lower in the dollar can be expected.


Price action in EURUSD was once again a function of European-US front-end rate spreads, however, cracks in this relationship are starting to appear. Following hotter-than-expected inflation data out of Spain and German regions yesterday morning, the widening in the rate differential due to the uptick in front-end eurozone government bond yields failed to ignite a rally in the single currency. This is mainly due to the environment in which these more hawkish interest rate expectations take place, with the eurozone now seen teetering on the edge of a recession in the second half of the year. In fact, the 0.5% rally in EURUSD awaited the downturn in Treasury yields on a softer Q2 GDP reading out of the US. The setup in markets yesterday illustrates the resistance EUR bulls are likely to find at this juncture given the current growth backdrop. These same difficulties have been evident in the options space ever since last week’s flash August PMIs, with risk reversals up to 3-months out skewing more negative.

Following yesterday’s Spanish and German inflation figures, which showed only marginal progress in the inflation battle, we upgraded our ECB terminal rate forecast. We now see the central bank raising rates one final time at September’s meeting, bringing the deposit rate to 4%. Although the optics of hiking into a likely recession aren’t ideal for the central bank, we think President Lagarde will be hard pressed relaying a hawkish pause in this environment. As such, any decision from the Governing Council will now be viewed as a final hike versus a likely termination in the hiking cycle. Data out of France this morning further confirms our view, with risks now tilted to the upside for the eurozone composite core and headline readings this morning at 10:00 BST.


Despite limited news flow out of the UK yesterday, the pound still managed to post gains, rising six tenths against the dollar and two tenths against the euro, as eurozone inflation data and a downgrade to US GDP figures weighed on the respective currencies. Indeed, the only data points of note out of the UK related to borrowing and money supply, and painted a picture of an economy that continues to slow. But this is not new news for traders, with recent PMI readings already pointing in this direction. Instead, it seems a no news is good news dynamic was positive for the pound over yesterday’s session, and could well continue through today with another quiet day of releases coming up. More interesting though was new analysis from Bank of England staff, suggesting that greedflation was not driving price growth in the British economy. Whilst not likely to move markets in the immediate future, notably the possibility of greedflation had been a big concern for BoE policy makers earlier in the year. Granted, it is not guaranteed that the staff paper is representative of MPC thinking, but if it is, it would seem to remove a big upside risk to inflation in policymaker minds, and would reinforce our call for the BoE to deliver a final rate hike in September. Whether or not this is the case, Bank of England Chief Economist Huw Pill speaks at 8:15 BST, in what is likely to be the only UK specific news of note for the day.



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