Disappointing US retail sales fuelled negative sentiment in the US session. The S&P500 ended the trade down by 0.2% after retail sales dropped 0.5% in June – a third consecutive decrease. The S&P future has erased yesterday’s losses in Asian trading on speculation that Bernanke could hint towards additional stimuli later today. In Asia, stock indices are trading in positive territory this morning. Hang Seng is up by 1.5% and Nikkei by 0.6%. US bond yields in longer maturities closed at new lows as one option for the Fed could be to extend the policy guidance into 2015. In FX markets, the EUR/USD has increased overnight and is this morning trading around 1.23.
Moody’s cut the rating of 13 Italian banks by one to two notches, as a follow-up on the sovereign downgrade last week. UniCredit and Intese – Italy’s two biggest banks – had their ratings lowered two notches to Baa2. The outlook remains negative, in line with the sovereign rating.
Corn, wheat and soybeans increased around 2% yesterday on the back of the recent US drought. With the El Nino forecast to return during H2, further weather disruptions are likely and the weather premium is likely to stay elevated but should eventually be priced out as farmers react to past price surges. The rise in food prices could cause a return of ‘agflation’ – i.e. inflation caused by rising prices for agricultural products.
Focus today will be on Fed Chairman Bernanke’s semi-annual testimony on monetary policy to the US senate. It will be interesting to see whether the weak payroll number for June and yesterday’s disappointing retails sales data have caused Bernanke to turn more dovish. Our economists still expect another round of quantitative easing before the end of the year. Also the US releases of CPI, industrial production and the NAHB housing market data are worth keeping an eye on. In the European session, the ZEW data tends to attract attention as this is one of the first soft indicators for July. Note though that this figure tends to be more correlated with market sentiment than economic activity. In the UK, CPI data is the main release. Finally, the earnings season continues with Goldman Sachs and Coca-Cola reporting today.
The main event in Scandinavia today is the release of Riksbank monetary minutes from the 3 July meeting. The fact that the board settled for a marginal reduction of the repo rate path suggests that someone or perhaps a few of the majority that voted for an unchanged repo rate yet saw some downward risks to the economy. Hence, don’t be surprised if there are softening comments from that camp. That said, the money market is currently pricing in more than 50bp in rate cuts before year-end. In our view, that is quite aggressive