Mixed data from the US

Market movers today

Focus reverts to the Bank of England meeting today. Despite rising inflation and some hawkish comments from MPC members, BoE is expected to keep its benchmark interest rate and its bond-buying target unchanged. Our base case is that BoE will gradually turn more hawkish and end QE this year (perhaps even prematurely), but not hike until H2 22 (see more in Research UK - Economic recovery is set to continue, 30 July).

Germany will report June data on factory orders which disappointed in May. Despite record highs in manufacturing surveys, supply chain bottlenecks are increasingly weighing on production levels (see Euro Area Macro Monitor - Back in the fast lane, 4 August).

The 60 second overview

Mixed US data: The US private sector ADP employment report for July missed expectations with 330 thousand new jobs (June 692k, Cons. 690k). Leisure and Hospitality sector remains the key driver of employment growth (+139k new jobs). While the weaker-than-expected figure suggests labor shortages are still limiting jobs growth despite large part of states having already ended the extraordinary unemployment benefits, the ADP report has often been a poor predictor of the non-farm payrolls released on Friday. On a more positive note, the US ISM Services index for July reached all-time high levels at 64.1 (June 60.1) driven by rapidly rising business activity (67.0; June 60.4). Unlike the ADP report, both ISM Services and Manufacturing suggested faster jobs growth in July.

Fed speak: Richard Clarida suggested that Fed will likely announce tapering this year and noted that the conditions for a rate hike could be met already by the end of 2022. This is in line with market pricing which currently expects the first rate hike in early 2023.

ECB: ECB's Kazaks suggested that the central bank is unlikely to make decisions about PEPP's future in the September meeting. While he saw further policy support as unlikely under ECB's revised strategy, he noted that the timing of future rate hikes could be pushed further if inflation fails to meet the new symmetric target. 

Equities: Another very interesting session yesterday resulted in Europe outperforming US as the shares dropped after both interesting news from the macro and monetary side. Sector performance very mixed with tech somewhat higher and energy sharply lower as the oil price dropped for a third day in a row. Hence, this resulted in the special setting with cyclical growth outperforming defensive value and large cap outperforming small cap. In US Dow -0.9%, S&P 500 -0.5%, Nasdaq +0.1%, Russell 2000 -1.2%. The interesting market moves continuing this morning with a mixed setting in Asian while European are slightly positive together with the us once.

FI: It was a volatile day in the US Treasury market with 10Y US Treasury yield trading between 1.13% and 1.21%. Bunds also dipped below -0.50%, before bouncing back up above -0.50%. The move in the bond yields was driven by different comments from both Federal Reserve and ECB regarding when to begin tapering (the Fed) and when to change the PEPP (ECB).

FX: EUR/USD first jumped to 1.19 and then fell back again on mixed US data and comments from Fed members. EUR/SEK dropped below 10.20, while EUR/NOK held steady close to 10.45.

Credit: Credit continued to exhibit only modest movements yesterday. iTraxx Xover closed ½bp wider (in 236½bp) and Main finished only marginally wider (in 47bp). Both HY and IG cash bonds were unchanged.