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That Steepening Feeling

Morning Briefing 12th July 2019

The final data releases this week include the publication of final figures on Spanish inflation at 0800BST as well as the publication of data on industrial production for the Eurozone at 1000BST. At 1330BST the US producer price index is released.

After accelerating for four months and reaching a rate of 1.6% in April, annual HICP slowed to 0.9% in May. On the month, inflation grew by 0.2% in May, following a rate of 1.1% in April. In June Spanish HICP is expected to register in line with the flash estimate showing inflation edging down 0.3pp to 0.6% and leaving the monthly rate at -0.1%. The y/y CPI inflation rate (0.4%) fell back to its lowest level since Sep 2016. INE highlights another significant softening in y/y electricity and fuel price inflation.

Industrial production in the Eurozone is expected to rebound to 0.2% on the month, while the annual rate is forecast to deteriorate to -1.5%. Industrial production showed a solid start into the year but the growth rate has been falling ever since and reached a four months low in April (0.5% m/m). April’s decline was led by a fall in durable consumer ( 1.7%), capital (-1.4%) and intermediate (-1.0%) goods, while the production of non-durable consumer goods (0.2%) and energy (1.4%) saw monthly gains.

US final demand PPI is expected to rise by 0.1% in June after a modest 0.1% May increase. Energy prices are expected to fall further, while food prices are expected to rise after falling in the previous two months. Excluding food and energy prices, PPI is forecast to rise 0.2% for a second straight month.

Global Economic Trading Calendar

Markets

BOND SUMMARY: Core global FI futures failed to gain any real traction below their respective Thursday lows, even with the S&P 500 e-mini futures setting a fresh all time high during Asia-Pacific hours. Regional players may have been happy to fade yesterday’s Tsy sell off/take profit on the move. T-Notes last -0-02 after sticking to a tight range, with yields 1.0-1.4 bp lower across the curve. The main interest in terms of flow came via upside plays via USQ9 157.50 & 158.00 calls. Eurodollar futures trade unch.-1.0 tick higher through the reds.- JGB futures had a look below their overnight low, before backing away from lows. This was aided by softer offer to cover ratios in the BoJ’s latest Rinban ops, which saw the size of 1-5 & 10-25+ Year JGB purchases left unch. Offer to cover ratios were as follows: 1-3 Year 2.64x (prev. 3.79x), 3-5 Year 2.68x (prev. 3.48x), 10-25 Year 1.84x (prev. 2.69x). 25+ Year 2.55x (prev. 3.81x).- Little to pen for Aussie bonds, with the space looking through next week’s heavy AOFM issuance schedule (likely aided by the fact that there will be no ACGB issuance in the week commencing July 22) YM last -5.5 ticks, XM -11.0 ticks. Bills trade 1-6 ticks lower than settlement at writing.

STOCKS: A very contained end to the week for the major Asia-Pacific equity indices, even as S&P 500 e-mini futures managed to register a fresh all time.- U.S. President Trump took to Twitter in NY hours, lamenting China’s lack of follow through re: the purchasing of U.S. agricultural product, which may have spread some caution amongst market participants as we head towards the end of the week.- The ASX 200 experienced some marginal underperformance, as the IT & materials sectored weighed. Although this was cushioned by outperformance for the energy and financial sectors.- Nikkei 225 unch., Hang Seng +0.3%, CSI +0.2% & ASX 200 -0.1%.

OIL: WTI & Brent sit around $0.30 above their respective settlement levels, after sticking to tight ranges on Thursday, consolidating the bulk of Wednesday’s sharp leg higher.- Focus continues to fall on storm Barry, which has resulted in over 50% of the Gulf of Mexico’s crude and natural gas production being shut in. This equates to circa 1mn bpd worth of production on the crude side. The NHC has suggested that the tropical storm may become a hurricane later today.- Elsewhere, Thursday saw focus fall on OPEC’s monthly oil report. The cartel’s secondary sources noted that the group’s cumulative production fell by 68K bpd in June, while it left its estimate for the demand of its crude during 2019 unchanged, as its initial 2020 projection projected steady demand vs. its current 2019 projection.- On the supply front we saw INEOS note that the Forties pipeline system has resumed operation after the repairs to one of its lines.- Baker Hughes rig count data will hit late Friday.

GOLD: U.S. Tsy yield dynamics continue to be the driving factor for the yellow metal, which last trades $5 or so higher at $1,409/oz as yields edge lower. This comes after stronger than expected core CPI data weighed on bullion on Thursday.

FOREX: USD weakness remained the dominant theme as the greenback remained on a back foot under pressure from the latest round of dovish Fedspeak, which keeps a rate cut this month on the table. The impact of dovish central bank rhetoric failed to dissipate even as U.S. CPI, released yesterday, topped forecasts.- Elsewhere in G10 FX, safe havens were offered, while commodity-tied currencies gained poise. USD/CAD touched a new YtD low and hovers just above the figure; NZD/USD was limited by its 100-DMA, tests the level at writing.- Turning to Asian FX, Thai baht tumbled as the Bank of Thailand introduced measures to limit its strength. Meanwhile, KRW was sold as growth worries and South Korea’s trade spat with Japan continued to apply weight.- U.S. Pres Trump tweeted that he is “not a fan of Bitcoin and other Cryptocurrencies,” while “Facebook’s Libra will have little dependability.”- Today’s data highlights include Chinese trade figures, U.S. PPI, as well as industrial production figures from Japan and the EZ. Speeches from ECB’s de Cos and Visco, BoE’s Vlieghe, Norges Bank’s Nicolaisen and Fed’s Evans are scheduled, with Riksbank’s July MonPol meeting minutes due.

Technical Analysis

BUND TECHS: (U9) BROADER TRENDLINE SUPPORT BREACHED

U9 Bund selling pressure extended once again yesterday. This week has seen trendline support drawn off the May 3 low breached and yesterday the broader trendline support, drawn off the Apr 17 low, at 171.83 was breached. The sharp sell-off this week is expected to extend with momentum studies in a bear mode too. The focus is now on the 38.2% retracement of the rally between Apr 17-Jul 4. Resistance provided by the former trendline support, intersects at 171.92.

EUROSTOXX50: VULNERABLE FOLLOWING TRENDLINE BREAK

EUROSTOXX50 remains below last Friday’s high and has this week breached trendline support drawn off the Jun 3 low. This suggests scope for a deeper corrective pullback. A move below Tuesday’s low of 3492.18 would open 3476.08 next, the low of Jul 1. The 38.2% retracement of the rally between Jun 3-Jul 4 is at 3434.38. Resistance for today is 3531.47, the high of Jul 8. A move above this level is required to reinstate a bullish theme and open 3549.26, the trend high.

Eurex Futures Market Close

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