Moderate Recovery in Consumer Climate - And Declining Economic Expectations

Economic

Summary:

After a significant setback in the previous month, consumer sentiment in Germany recovered slightly in September 2024.

After a significant setback in the previous month, consumer sentiment in Germany recovered slightly in September 2024. Both income expectations and the willingness to buy are improving - accordingly, the consumer climate in the forecast for October shows a slight increase of 0.7 points to -21.2 points compared to the previous month (revised -21.9 points).

However, the recovery in the consumer climate is being dampened by the willingness to save, which is rising again this month. Germans see the general economic development in the next 12 months somewhat more negatively than in the previous month. These are the current findings of the GfK Consumer Climate powered by NIM, which has been published jointly by GfK and the Nuremberg Institute for Market Decisions (NIM), the founder of GfK, since October 2023.

Consumer climate is currently benefiting above all from improved income expectations and a slightly less pessimistic willingness to buy. By contrast, the renewed increase in the willingness to save by 1.3 points is preventing a clearer recovery in consumer climate this month.

“After the severe setback in the previous month, the slight improvement in consumer climate can be interpreted more as a stabilization at a low level. The consumer climate has not improved since June 2024, when it hit -21 points. Therefore, the slight increase cannot be interpreted as the beginning of a noticeable recovery. The consumer sentiment is generally too unstable for that,” explains Rolf Bürkl, consumption expert at NIM. “In addition to the well-known negative factors, such as wars, crises and inflation, the labor market has been added to the list as a factor in recent months.”

A slight increase in unemployment figures, a rise in corporate insolvencies and announcements by various companies that they are cutting jobs or relocating parts of their business abroad have certainly increased job worries among a number of employees.

Economic expectations decline for the second time in a row

The increasing public discussion about a rise in unemployment figures has also contributed to the fact that economic expectations – contrary to the slightly positive trend in consumer climate – have declined this month. The indicator fell by 1.3 points to 0.7 points. It thus shows exactly the same value as in April of this year.

As a result, Germans' opinion about the development of the general economic situation in Germany over the next 12 months has been stagnating for almost half a year.

In its recently published forecast, the ifo Institute also assumes that Germany will probably end 2024 with a red zero. The institute predicts that gross domestic product will decline by 0.1 percent in real terms.

Income expectations recover after slump in previous month

While the economic outlook is viewed less optimistically, income expectations among German consumers are recovering again after the slump in August. The income indicator has gained 6.6 points, climbing to 10.1 points. However, this means that it can only make up part of the enormous losses of over 16 points in the previous month.

Apparently, increasing worries about jobs are currently overshadowing the increases in purchasing power that many private households are currently experiencing. Inflation in Germany has stabilized at around two percent, while wage increases and pensions are increasing significantly more.

Willingness to buy: Tailwind from rising income expectations

Rising income expectations are providing a tailwind for the willingness to buy. It rose by four points and now stands at -6.9 points. This is the highest level since March 2022, when it was at -2.1 points.

Despite the current increase, the level of the willingness to buy is still extremely low. This shows that consumers remain extremely uncertain due to inflation, geopolitical crises and increasing concerns about job security.

To stay updated on all economic events of today, please check out our Economic calendar

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IFO

Economic

The German economy has been stagnating for over two years. Although economic output increased slightly at the beginning of the year, it shrank again in the second quarter. A slow recovery is likely to set in over the coming quarters. However, economic growth will not be able to return to the pre-COVID-19 pandemic trend in the foreseeable future. Decarbonization, digitalization, demographic change, and probably also stronger competition with companies from China have triggered structural adjustment processes in Germany that are dampening the growth prospects for the German economy.

Development in Germany

The overlapping effects of structural change and the economic slump are particularly evident in manufacturing, primarily affecting capital goods producers and energy-intensive industries. Their competitiveness is suffering from higher energy costs and growing competition from high-quality industrial goods from China, which are crowding out German exports on the global markets. However, the weakening global industry and the lack of new orders that entails are also causing economic problems for the manufacturing sector. This is mitigated by the strong increase in part in gross value added in the service sectors – especially those dominated by the state – such as education and healthcare.

According to the institutes, persistent weak investment is symptomatic of the problems in the manufacturing. In economic terms, continuing high interest rates and the high level of economic and geopolitical uncertainty in Germany are likely to have weighed on companies’ investment activity and private households’ propensity to buy.

Although private consumption was able to support the economy in the first half of the year, the hoped-for recovery failed to materialize despite a sharp rise in real disposable income. Private households increasingly set their income aside for a rainy day instead of spending it on consumer goods. The savings rate has risen for four quarters in a row and remains above its long-term level.

According to the report, the structural adjustment processes are likely to continue, and the economic brakes will only be released slowly. The tentative recovery is being driven by a revival in private consumption, which is supported by strong growth in real disposable income. The economic upturn in important sales markets, such as neighboring European countries, will revive German foreign trade somewhat. Together with more favorable financing conditions, this benefits capital investment.

Lower inflation is supporting the purchasing power of private households. The institutes expect inflation in the current year to be close to the ECB target again at 2.2% and 2.0% in 2025 and 2026 and that it will probably be driven mainly by inflation in the services sector.

The economic standstill is now more clearly leaving its mark on the labor market: The number of unemployed recently rose again slightly. Unemployment is not expected to fall again until next year, as economic activity gradually recovers.

Fiscal policy is set to be slightly restrictive this year and next. The German government’s growth initiative will probably provide only minor stimulus in the forecast period.

All in all, gross domestic product is likely to fall by 0.1% in 2024 and then increase by 0.8% and 1.3% respectively in the next two years. The institutes are thus adjusting their forecast from spring 2024 slightly downward, mainly because recovery in industry is now weaker.

Global Economy Expands – at Lower Rates

The global economy is currently expanding at slightly lower rates than in the decade before the COVID-19 pandemic. The pace has scarcely changed in almost two years. There are economic differences between the individual regions, which will decrease over the course of this year. While the previously very robust economy in the US is now losing momentum, structural problems in China are dampening overall economic expansion somewhat more than before. At the same time, the economy in Europe is on the up again after a long period of stagnation. In the eurozone, gross domestic product increased noticeably, by ¼% in both the first and second quarters, after a year and a half of near stagnation.

The global economy is likely to expand only moderately in the forecast period, supported primarily by the service sector and consumption. However, recessionary trends in the US are unlikely to become entrenched. Investments remain on an upward trend and should gradually be stimulated by further interest rate cuts. Expansion in the EU and the UK is likely to be somewhat stronger, while the trend in the US and China is likely to slow down.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Warren Takunda

Cryptocurrency

Spot Bitcoin exchange-traded funds (ETFs) in the United States saw their biggest daily inflow in more than two months as the asset broke above $65,000 in late trading on Sept. 26.

The total aggregate inflows for the 11 spot Bitcoin ETFs in the US hit $365.7 million on Sept. 26, according to preliminary data from Farside Investors.

The bumper ETF inflows were the largest since July 22, when there were inflows of $486 million. It also marked a sixth consecutive trading day of inflows for institutional investment products.

The ARK 21Shares Bitcoin ETF led with an inflow of $113.8 million, followed by BlackRock iShares Bitcoin Trust with $93.4 million.

BlackRock just had its largest inflow day for a month on Wednesday, Sept. 25, with $184.4 million.

The Fidelity Wise Origin Bitcoin Fund saw inflows of $74 million, the Bitwise Bitcoin ETF had $50.4 million and the VanEck Bitcoin ETF saw $22.1 million in inflows for the day.

Meanwhile, there were minor inflows for the Invesco, Franklin and Valkyrie ETFs, which had $6.5 million, $5.7 million and $4.6 million, respectively.

The Grayscale Bitcoin Trust was the only outflow, which bled $7.7 million, bringing the total outflow to $20.1 billion since it converted to a spot ETF in January. Bitcoin Buyers Throw $366M into US ETFs as BTC Pushes Above $65K _1

Bitcoin Buyers Throw $366M into US ETFs as BTC Pushes Above $65K _1

Spot Bitcoin ETF flows. Source: Farside Investors

The latest injection of capital brings the aggregate inflow since inception for all 11 spot ETFs combined to $18.3 billion.

ETF Store president Nate Geraci commented on the bumper inflow in a post on X on Sept. 27, observing:

“For context, out of 500 ETFs launched in 2024, less than 25 have taken this amount in for the *entire year*.”

On Sept. 25, Bloomberg ETF analyst Eric Balchunas commented that spot Bitcoin ETFs are “92% of the way to owning 1 million Bitcoin and 83% of the way to passing Satoshi as the top holder.”

BTC spot prices have gained almost 13% over the past two weeks in the wake of the Fed interest rate cut.

However, spot Ethereum ETFs are lacking the same momentum as nine funds registered an outflow of $100,000 on Sept. 26, according to Farside Investors.

The outflow came despite BlackRock and Fidelity both seeing more than $15 million in inflows for their respective spot Ether funds. Grayscale’s high-fee Ethereum Trust continues to hemorrhage assets, losing a further $36 million on Thursday.

Source: Cointelegraph

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ING

Forex

USD: Core PCE should not rock the market

US initial jobless claims came in once again lower than expected (218k versus 223k) yesterday, but continuing claims – which track the speed to re-enter the jobs market – rebounded to 1.834m. Durable goods orders were stronger than expected and the expected revision lower in 2Q GDP from 3.0% to 2.9% didn’t materialise.

Market pricing for year-end Fed rates inched higher by a few basis points over the past couple of sessions, but the dollar was offered again yesterday after some positioning adjustment on Wednesday. Anyway, markets continue to factor in a 50bp cut at any of the next two meetings.

Today, August PCE data will be released. We expect a core 0.2% month-on-month print, in line with consensus, and limited market impact. Even in the case of a small deviation from consensus, the recent shift in the Fed’s focus to the employment side of its mandate means markets are less sensitive to inflation news.

We think DXY can stay around in the 100.0-101.0 range for a few days. The next big move may only happen with a jobs data surprise next week.

EUR: ECB repricing faces inflation test

The first few September CPI prints across the eurozone will be published today. Both French and Spanish inflation is expected to have slowed (to 1.6% and 1.9%, respectively), although Spain’s core measure is seen rising from 2.7% to 2.8%.

German numbers are published on Monday and the eurozone-wide figures on Tuesday. Inflation has the potential to trigger some hawkish repricing in European Central Bank rate expectations given that Governing Council members recently showed reluctance to give in to easing pressure despite a gloomy economic picture.

EUR/USD found some support yesterday, and another break above 1.12 is surely possible into next week’s US payrolls data.

GBP: Strength continues

It’s been a quiet week in the UK calendar, but the weak economic indicators out of the eurozone have dealt a blow to EUR/GBP. We saw the pair test the 0.8320 level earlier this week, and while we continue to see a good case for a rebound beyond the short term as Bank of England easing may be underpriced, we probably need some inflation surprise in the eurozone to prevent 0.8300 to be tested soon.

The EUR:GBP swap rate differential collapsed as markets increased bets the eurozone’s grim outlook will force the ECB into larger cuts than the BoE, and is now at -155bp, the widest since December 2023. That should keep some pressure on the pair in the near term.

In cable, the fresh 1.34+ highs are also justified by the policy rate differential, although expectations for a 50bp Fed cut may be misplaced, and GBP/USD may start to look expensive soon.

CEE: Different country, different implications of rate cuts for FX

Friday's calendar in the region indicates a rather quiet end to the week with a focus on US numbers. Only after the close of trading today will we get a sovereign rating review of Romania from Moody's. Still, CEE currencies have come under pressure over the past two days and we may see some attractive levels across the board. EUR/HUF quickly moved up to 396, which was the level we mentioned in the National Bank of Hungary review following Tuesday's central bank decision to cut rates by 25bp. For now, we see no reason to move to the 400 level, but given the repricing in the rates market in a dovish direction, we remain bearish on the forint and potentially expect more weakness.

On the other hand, EUR/PLN has been moving higher for the last two days, touching 4.280 this morning, with no visible reason to us, and the zloty is showing attractive levels for new buyers, especially ahead of the inflation print and National Bank of Poland meeting next week. On the other hand, EUR/CZK remains steady after the Czech National Bank meeting this week and the end of yesterday's trading suggests a move lower, which we discussed here earlier this week. Despite the dovish market pricing, we believe that even the current rate levels would imply a stronger koruna while a possible repricing may add additional impetus to the CZK. We therefore remain bullish on CZK, however, today's direction will be mainly driven by US data across the region.

Risk Warnings and Disclaimers

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Warren Takunda

Economic

Rachel Reeves is considering changes in next month’s budget to the government’s so-called fiscal rules, which govern how much it can spend.

The changes are aimed at paving the way for billions of pounds more investment in the UK economy, to help decarbonise the economy and reboot growth.

Reeves signalled the change in direction in her speech to the Labour party conference on Monday, saying “it is time that the Treasury moved on from just counting the costs of investments to recognising the benefits too”.

But with government debt running at 100% of GDP, and a total debt pile of £2.5tn, there are questions over how far Reeves could go. How Rachel Reeves Could Release Billions More for Investment in the Budget_1

How Rachel Reeves Could Release Billions More for Investment in the Budget_1

Would this break a manifesto pledge?

Before the general election, Reeves pledged to meet two fiscal rules, which were largely unchanged from the self-imposed measures drawn up by her predecessor, Jeremy Hunt.

The first manifesto pledge was that day-to-day spending would be balanced with tax receipts.

Speaking at a fringe event at the party’s annual conference, Reeves stressed this measure would be “incredibly hard” to meet and would still require the government to make “tough decisions” on tax and spending.

“The £22bn black hole in the public finances makes that even harder,” she said. “If you carry that £22bn forward for every year of the parliament, the previous government would not have met their fiscal rules, and we won’t meet our fiscal rules, so that’s why we have to take action at the budget in October.”

The second rule was that debt must be falling as a share of the economy by the fifth year of forecasts produced by the Office for Budget Responsibility. This is where Reeves is most likely to make changes.

While this could break a manifesto pledge, the Treasury sees things differently: Reeves could argue she is changing the definition of debt, while still committing to bring down this alternative measure.

Why does the Bank of England matter?

One well-trailed idea is excluding the losses for the Treasury on the Bank of England winding down its crisis-era quantitative easing bond-buying programme. Experts say this could open up £10bn-£20bn of headroom.

Threadneedle Street amassed bonds worth £895bn as it battled the 2008 financial crisis and Covid pandemic. However, they are now being sold for less than was paid, with the Treasury picking up the tab. Total losses could hit £100bn over the next decade.

Reeves got a £10bn boost earlier this month when the Bank announced it would sell £100bn of bonds over the next year – less than the OBR expected, and therefore crystallising fewer losses. However, excluding the losses altogether would add further headroom.

Could the chancellor argue green investment should not add to debt?

Reeves could exclude Labour’s new public investment companies from the debt targets, allowing the chancellor to borrow as much for these vehicles as she thinks the market will have appetite to lend.

Britain is an outlier compared with several countries that already do this with their state-owned energy companies.

Sources said trade unions had briefed the Treasury on this, highlighting how Germany excludes the energy company Stadtwerke München. Ørsted’s borrowing is not included in Denmark’s national figures, Vattenfall’s debt is not counted by Sweden, and neither Statkraft nor Equinor feature in Norway’s. Germany’s state-owned development bank, KfW, is also excluded.

This is because the Maastricht Treaty’s definition of debt excludes publicly owned entities engaged in “corporate activity” or “market production”, definitions which include the liabilities of savings banks, public utilities and waste management operators.

Allies of Ed Miliband say the energy secretary has argued for keeping the new institutions off the government balance sheet, but that he is not part of the pre-budget decision-making process.

Could Reeves change the debt target?

Currently the fiscal rules target public sector net debt (PSND), which measures the stock of past borrowing and totals £2.5tn. But this measure does not give any credit for huge swathes of assets that the state owns, from roads to public parks.

Reeves could decide to target an alternative already tracked by the OBR: public sector net financial liabilities (PSNFL), which take into account all financial assets and liabilities and totals about £2.4tn.

At the March budget, public sector net debt was forecast to rise, before a modest fall from 93.2% of GDP to 92.2% in the fifth year – meeting Hunt’s fiscal rule with £8.9bn to spare in cash terms.

On the alternative measure, debt was forecast to drop in every year – including a significant drop from 80.6% of GDP to 78.7% in the fifth year, worth more than £50bn in cash terms.

The main source of difference is how public assets, on which the government would expect a future financial return – including student loans and equity stakes in companies – offset liabilities, such as government debt and public sector pensions.

“The current debt target sets an incentive to sell off illiquid assets – like the student loan book – without regard for whether you get a good price for it, or whether you think the public sector, or private, are better placed to manage it in the long term,” said Isabel Stockton, an economist at the Institute for Fiscal Studies thinktank. However, there could also be challenges. “If that became your main fiscal rule, you’d be concerned about the incentive for gaming the system – to organise more parts of public spending as loans.”

Could the chancellor go further?

One of the most flattering possible measures Reeves could target is public sector net worth (PSNW), which includes non-financial assets – such as the road network, schools and hospitals – alongside financial ones.

Using these assets to offset the government’s liabilities, the measure currently shows a deficit of about £700bn – a considerably lower sum than Britain’s headline £2.5tn net debt pile.

Taking this broad view could help show the value of investing in everything from buildings and roads to machinery, intellectual property and artworks. Economists at the International Monetary Fund praised the metric in July, saying it was “more conducive to public investment and economic growth,” and could still act as an anchor that “precludes unsustainable debt dynamics”.

However, the measure could be tough to adopt, as non-financial assets can be difficult to value. Roads like the M4 motorway and buildings like No 10 Downing Street might be undesirable to ever sell, or to dispose of quickly.

Expanding the scope of what the government counts under the measure could also bring in some unhelpful liabilities, such as PFI contracts – which have been deliberately taken off the government books – and unfunded pensions schemes.

For these reasons, economists often argue PSNW should not be the main target a government adopts, but could be helpful as part of a wider set of measures because it could help to incentivise investment.

Would there be a risk of a Truss-style market reaction?

Part of the reason Reeves has stuck so neatly to self-imposed fiscal rules is for political reasons – to show voters that Labour can be trusted with the public finances. But it is also to demonstrate to financial markets that the new government is committed to avoiding a repeat of Liz Truss’s mini-budget.

The Treasury has previously warned that any increase in borrowing is likely to increase inflation and interest rates, according to one official who has recently departed the department.

The person added: “I think officials will be a lot more comfortable with the Bank of England change than an open-ended allowance for the government to borrow as much as it likes to fund capital spending. Once you have carved out GB Energy, why not make it much bigger and load it up with debt?”

Jeremy Hunt, the former chancellor, tweeted on Thursday: “My advice from HMT officials was always very clear on this: more borrowing means interest rates stay higher for longer.”

However, the current fiscal rules have become increasingly discredited among leading economists. Stockton at the IFS said that frequent changes to the rules could alarm markets, but suggested some tweaks would be welcomed.

“It certainly looks like keeping KfW outside the German debt rule doesn’t impact the costs that Germany can borrow at. Investors seem fine with that,” she said.

Andrew Goodwin, chief UK economist at the consultancy Oxford Economics, said Truss had spooked markets after undermining the Treasury and the Bank of England, and by announcing large tax cuts that would have done little to boost the long-run potential of the UK economy.

“It partly depends on the scale and type of loosening that Reeves employs after changing the rules, but I think the risk of a Truss-style event are very low,” he said.

“If Reeves were to use the extra headroom to boost investment, then I think markets would view that as a sensible choice.”

Source: TheGuardian

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Cohen

Economic

Physical gold demand contracted in key Asian hubs this week, as a surge in prices to record highs deterred buyers and encouraged some to cash in on their holdings.

"Prices are high, so there are fewer buyers and more sellers. However, we do see some buyers coming in, as many investors are worried that gold prices will continue to rise," said Brian Lan at Singapore-based dealer GoldSilver Central.

"Most clients are selling to take profits, and some are liquidating jewellery they no longer wear for cash."

Local prices in top consumers China and India were at all-time highs, tracking a record-breaking rally in international spot gold prices, which is up more than 29% so far this year.

"Demand has been extremely low as consumers are unable to digest the rapid price increase," said Amit Modak, chief executive of PN Gadgil and Sons, a jeweller based in the western Indian city of Pune.

Indian dealers offered a discount of up to US$19 (RM79) an ounce over official domestic prices this week, inclusive of 6% import and 3% sales levies, up from last week's discount of US$17.

The sharp rally in prices also neutralised the impact of a reduction in import duties on gold to 6% from 15%.

"Jewellers are reporting a drastic reduction in foot traffic across the country. The price rise has suddenly pushed retail consumers, who were active after the duty cut, into a waiting mode," said a Mumbai-based bullion dealer with a private bank.

In China, discounts of US$16-US$7 on global spot prices were offered, compared with last week's US$12-US$14 discount.

Physical off-take remains deeply lacklustre which suggests we have a two speed market, said independent analyst Ross Norman, adding that China's stimulus package reflects deep concerns about its ailing economy.

China refrained from gold imports from Switzerland for the first time since January 2021, and net gold imports via Hong Kong fell 76% to their lowest level in more than two years in August.

Source: Theedgemarkets

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Danske Bank

Economic

In focus today

In the euro area, focus today is on the September inflation data from Spain, France, and Belgium, which will give clues on the euro area data on Tuesday next week. We expect euro area HICP inflation to decline significantly to 1.8% y/y in September from 2.2% driven by both base effects on energy inflation and declining monthly energy prices. Excluding energy inflation and food, we expect core inflation remained at 2.8% y/y (0.20% m/m s.a.) due to sticky services inflation. The dip in headline inflation below 2% is expected to be temporary due to base effects and we expect inflation to rise above 2% again in November and December.

In Germany, we focus also on data on unemployment as the German labour market has weakened lately in contrast to other euro-area countries.

From the US, headline and core PCE inflation are released today, where markets see prints at +2.3% y/y and +2.7% y/y, respectively.

Although economic activity in Norway has been relatively weak over the past year, there has been only a moderate rise in unemployment. We expect that the unemployment rate increased marginally to 2.1% (seasonally adjusted) in September. Higher real wage growth and a period without rate hikes have improved the purchasing power of households, and private consumption picked up in the summer months. However, we expect that the retail trade was unchanged in August.

We are yet to see results from the Japanese ruling LDP leadership election, which will be interesting for markets due to the recent hawkish turn of the BoJ looking highly politically influenced. Abenomics loyalists preferring a slow normalisation of monetary policies as well as hawks are on the ticket in an election that will be heavily influenced by behind-the-scenes arm wrestling among party heavyweights.

Economic and market news

Oil prices tumbled about 2.5% on the news that Saudi Arabia has allegedly abandoned its (unofficial) price target of 100 USD/bbl. and instead opt to boost production to regain market shares. Note that we have no official communication yet, but the existing OPEC+ production cuts are slated to expire on 1 December, and this will be a shift from the trend since 2022 where focus has been on cutting, rather than increasing, oil production.

The SNB cut its policy rate by 25bp to 1.00% as we expected. Markets were close to evenly split between 25bp and 50bp, which resulted in a slight move lower in EUR/CHF upon announcement, though dovish communication caused the cross to erase losses. See more below.

In China, we got more stimulus signals with both verbal communication from the Politburo on the need for policy action to turn the economy as well as specific details on handouts and spending-vouchers, capital injection into state banks, and support for the property market. The combined package from the latest days highlights the strongest focus on ending the crisis we have seen since 2021 in our view. Chinese stocks, metal prices and the CNY continued to rally during the day.

Tokyo CPI saw core inflation at +0.19% m/m adjusted for seasonality, which is well in line with the BoJ’s target of 2% annual inflation. The so-called ‘core core’ figure, which excludes food and energy, printed at just at 0.06% m/m seasonally adjusted however, indicating somewhat softer price pressure providing downside risk for inflation, and the market reaction was initially for a slightly weaker yen. Broadly, however, the BoJ will be satisfied with the latest print, and it will likely not change the decision in October, where we expect a hold.

Equities: What a day in global equities yesterday, marked by significant global increases and an intriguing sector rotation. On one hand, China is stimulating its economy; on the other, Saudi Arabia is potentially abandoning its oil price target to regain market share. In Europe yesterday, the energy sector was down more than 3%, while the consumer discretionary sector rose by more than 5%, driven by car producers and, notably, heavyweight luxury brands. This serves as a poignant reminder for all of us to check whether our judgments are correct and for the right reasons. It’s easy to deceive oneself these days. In the US yesterday, the indices were as follows: Dow +0.6%, S&P 500 +0.4%, Nasdaq +0.6%, and Russell 2000 +0.6%. Most Asian markets are continuing to rise this morning, once again led by significant gains in Chinese stock markets – it looks like we are on track for best week for Chinese stocks since 2008(!).

FI: There was modest movement in European government bond yields yesterday apart from the continued pressure on France, but neither the Bund ASW-spread nor the BTPS-Bund spread has widened as we saw back in June. Hence, we are not seeing the same kind of risk-off movement as we saw back in June when President Macron called a snap election. Revision of US economic data as well as lower-than-expected jobless claims sent US bond yields higher with 2Y Treasuries rising almost 10bp yesterday.

FX: EUR/USD has spent most of the last two weeks within the 1.11-1.12 interval, though with a couple of unsuccessful attempts to break out of the range. USD/JPY tried to establish above 145 but was rejected twice yesterday. The British pound continues to shine on the back of relatively solid data and tight monetary policy stance – yesterday GBP/USD made a new 2.5year high at 1.3430. The Swiss franc strengthened after the SNB cut 25bp and EUR/CHF is back trading in the mid-0.94s. EUR/NOK held on to previous gains just below 11.80, while EUR/SEK was rangebound around 11.30. USD/CNY has fallen below 7.02 in recent days on the stronger stimulus signals and likely new capital inflows to the stock market. Our medium-term view is still that the cross will resume higher as we remain bullish on the USD. But there is rising downside risk to our 7.25 12M forecast. EUR/CNY has fallen to around 7.84, the middle of the 7.70-7.95 range it has traded in for a long time now. We could see more downside in the medium term as it is expected to also get support from a lower EUR/USD. The idiosyncratic strengthening of the CNY has led to a bit of decoupling in the normal high correlation between EUR/USD and EUR/CNY, but we expect it to resume when the dust settles from the recent days action.

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