The Irish economy grew by a much stronger than expected 2.7% Q/Q

• US equities had a strong run yesterday with indices up about half a percent. The Dow traded above the 17 000 mark for the first time ever, while the S&P set another all‐time high, closing at 1985. In Asia, equities trade mostly slightly higher, but the Chinese and Korean bourses register now small losses.

• The Irish economy grew by a much stronger than expected 2.7% Q/Q and 4.1% Y/Y in the first quarter. New European accounting rules resulted in a sharp upward revision of the size of the economy that may have impact on the deficit, debt and on the austerity measures needed to satisfy European rules.

• ECB Weidmann warned that ultra‐loose monetary policy leads over time to financial stability risks.

• The market calendar is extremely thin today with only the UK car registrations for release. In EMU, the ECB will announce the 3‐year LTRO repayments. US markets are closed today in observance of the July 4th independence holiday.

Markets

Yesterday, it was the US payrolls report that dominated trading. It was a lot stronger than expected. Payrolls rose by 288 000 and the unemployment rate fell to 6.1% from 6.3% previously. It suggests that the labour market is now definitely gaining strength, which might in time have an impact on Fed’s monetary policy stance. However, markets still discount a first rate hike only in September/October 2015 with an end‐of‐year FF rate expectation of 0.78%, below even the Fed’s (median) projection of 1%. So, despite its strength, the June payrolls haven’t convinced markets that the Fed might move earlier and somewhat more pronounced than the very gradual rate path discounted by the markets. The ECB left as expected policy unchanged. There were a number of interesting announcements like the decline of the frequency of the ECB meetings and the publication of Minutes of the ECB meetings from January 2015 onwards. The ECB also released details of its TLTRO, funding for lending facility.
Finally, the UK services PMI was a tad weaker than expected, but still points to with solid activity. The US Non‐manufacturing for June was strong at 56, but a tad below expectations.

In the bond markets, the US payrolls report carried most weight, even if the Bund (not the US Treasury) was already under some downward pressure in the morning session, after weak EMU retail sales and ahead of the ECB. US Treasuries sold off on the payrolls, but following the downturn on the ADP report on Wednesday, the damage was all in all contained. Even more, the US Treasury approached first support (123‐25), couldn’t threaten it and gradually erased most of the post‐payrolls losses, ending at 124‐07+, a minor 5/32 daily loss. Also the 2.66% 10‐year yield resistance couldn’t be broken in a sustained way. Similarly, the Bund tested first minor support (146), on a spike after the payrolls (145.85), but immediately returned above 146 and recouped further out most of the intraday losses, ending the session at about opening levels. US yields rose by up to 3 basis points, the 3‐year rising the most. German yield yields were nearly flat till the 15 year part of the curve and 1 basis points higher further out.

The inability of the US payrolls to trigger a more negative reaction on the core bonds is a bit strange and might have been influenced by the 4th of July holiday which will keep the US out of the markets today. We think that the payrolls nevertheless has put a bottom under core bonds, but that needs to become visible in the price action next week. For today, the calendar is empty and with US traders absent, we expect a thinly, sideways oriented, traded European bond market.

In the FX markets yesterday, the dollar gained against euro and yen, but not against sterling. The stronger payrolls triggered dollar buying. EUR/USD dropped from about 1.3650 to 1.3620 on the release and made an additional trip to just below 1.36 when the ECB press conference got going. There was not much news from Draghi, but he repeated that while the value of the euro is not a target, it is very important for its outlook in price stability. However, the air below 1.36 was still too thin and EUR/USD rose back to just above 1.36 before closing at 1.3610, a 50 ticks daily gain. The dollar performance is a bit disappointing given the strength of the payrolls and its possible impact on Fed policy. However, on the other hand, bond yields fell back after the first spike higher and the yield spread narrowed a bit from intra‐day highs, which might have prevented steeper dollar gains. Looking to the technical picture, EUR/USD is again deeper inside the 1.3503 to 1.3701 range. We keep our ST neutral EUR/USD, but chances have grown that the pair may in the next few days re‐test the bottom of that range.

Similarly USD/JPY jumped higher on the strong payrolls from about 101.90 to 102.20 and stayed at these levels into the close. However, overnight the yen is strengthening and USD/JPY changes hands just above 102. Asian bourses are slightly higher, but with the exception of China and Korea where equities are somewhat lower. There is little news from Asia and flows are reported as extremely thin, as traders stay side‐lined. So, we suspect that the decline in USD/JPY won’t carry far, even we find it a bit disappointing for the dollar.
Technically, USD/JPY is now away from the bottom of a sideways 101.30/100.76 to 102.80/103.02 range, but the ST technical picture hasn’t changed. For that to happen it should leave the range. That’s nothing for today.

Sterling was the winner of the day. It digested during the morning session very well a slightly weaker than expected services PMI and some dovish talk of BoE Cunliffe. On the strong US payrolls, it recouped easily losses against the dollar.
So, cable ended nearly unchanged at 1.7155 and is currently even testing the cycle high at 1.7177. EUR/GBP tried twice to move higher, but sterling buying pretty fast showed up and pushed EUR/GBP back to opening levels. After the payrolls, EUR/GBP broke lower, setting new lows at 0.7934 (close). Overnight, in thin trading the pair lost some additional ticks and change hands around 0.7922 going towards the European opening. Today, the UK calendar contains only the Car registrations, no market mover. And similar, the EMU retail PMI is no market mover. The technical picture of EUR/GBP deteriorated further as the 0.7959 low is now sustainably broken. The next key support is 0.7755 (2012 low) and there is little significant intermediate support. We keep our longer term sterling positive view. For today, trading might be more sideways oriented, also as cable meets technical resistance that is probably too early to break.