Continued 'schwarze Null' discussions in Germany

Market movers today

There is no tier 1 data out today, although DKK CPI is due out this morning, where we expect a further decline to 0.3% from 0.6% in June (see page 2), so focus will continue to be on political risks from the US-China trade war and the political situation in Italy.

Later this week attention turns to German ZEW (Tuesday), US core inflation (Tuesday) and Chinese data on industrial production and retail sales (Wednesday).

Markets will also keep a close eye on any policy signals from Fed and ECB members following the recent market turmoil and escalation of the trade war.

In the Scandies, Swedish inflation data is due for release (Wednesday). The Norges Bank meeting (Thursday) will give more guidance on the outlook for rate hikes.

Selected market news

In Germany, discussions regarding the government's 'schwarze Null' policy, essentially committing the German state to a balanced budget at all times, continued over the weekend, with German defence minister Annegret Kramp-Karrenbauer defending the measure in an article in Welt am Sonntag , while members of the Bundestag from both the SPD and Die Grüne were asking for more public investments. The debate comes after a week when a government source said that the finance ministry was currently reviewing its funding options ahead of an upcoming climate package with costs reaching EUR30bn, which could see the 'schwarze Null' policy violated. The debt brake was introduced in 2009 and prohibits Germany's Länder from running a budget deficit and limits the structural deficit of the federal government to 0.35% of GDP. The measure has been popular so far among voters, but questions were raised already in the spring; however, mostly from academics, where discussions went along the lines of the nominal interest rate of debt being below the nominal growth rate of GDP, implying that the debt burden to future generations from raising new debt will be manageable under this condition. For now, however, it seems all coalition partners remain fixed on 'die schwarze Null'. The discussions should be seen as part of a more fundamental shift and willingness among Europe's political leaders to embark on financial stimulus in a scenario of potentially impotent monetary policy measures, with Germany being one of the few countries able to do so.

Japanese 10-year yields (-2bp to -0.22%, thus below the lower bound of the target range of the Bank of Japan (BoJ)) continues their decline despite the BoJ cutting long-end purchases, in a bid to steepen the yield curve, as well as a surprisingly strong Q2 GDP figure last week. The outlook for the Japanese economy is dimming and the continued flattening of the curve reflect the markets' expectation of further QE.

The People's Bank of China (PBOC) continues to signal an orderly depreciation of the yuan with another fixing in line with expectations. In a statement over the weekend, the PBOC also indicated a further opening of the bond market including improving overseas access to the repo market.

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