Yen up, pound down


US (and other) government bond yields continue to retreat. On 10-year treasuries the return is 1.95%. Whatever the Federal Reserve actually ends up doing this year, investors see cash rates falling over time.  

That situation is not constructive for the USD, and nor were Tuesday's few US ecostats. The Johnson Redbook index put retail sales 5.5% above the same week last year but 2.4%~ down from a month ago. ISM's report on business put current business conditions at 50.0, on the cusp of growth and contraction. The IBD/TIPP survey of consumer confidence was a little more upbeat: at 56.6 it was the 34th consecutive month of positive, above-50, readings. The USD was in the middle of the major-currency field, unchanged on average against the others.


The European Council at last produced a list of names for the EU's top appointed jobs. Most of them are unfamiliar to investors: the other one, Christine Lagarde, is nominated to head the European Central Bank. Although Mme Lagarde is neither a banker nor an economist, but a lawyer and a politician, she does have experience as France's finance minister and for the last eight years has headed the International Monetary Fund. The general view is that she is the "continuity" candidate, sharing Mario Draghi's taste for monetary stimulus and a supporter of his "whatever it takes" approach to preserving the euro.

The Euroland purchasing managers' index readings for the services sector this morning came in at or around forecast. All were within the expansion zone above 50. Germany won with a 55.8 and Italy looked softest at 50.5. The composite reading for pan-Euroland was 52.2 with the services sector at 53.6: Manufacturers might be struggling but consumers are still buying burgers and haircuts. The EUR is unchanged against the USD.


An unusual lack of correlation between oil prices and the Loonie saw WTI crude fall 4% while the CAD picked up 0.2% against the USD. The decline in oil prices came despite the OPEC+ agreement to curtain production. Investors believe the traditional cartel is no longer in a position to set prices because North American shale oil production has become so important. They also see problems as a result of a looming global economic slowdown.

The CAD received some help from the delayed Canadian manufacturing PMI. Although production fell in June at its fastest rate in three and a half years, the 49.2 reading was a tick higher on the month and two ticks above the forecast 49.0.


Britain's services PMI at 50.2 was disappointing, nearly a point below forecast and a point lower on the month. It was still - just - in the growth zone but Markit's report summed it up as "close to stagnation". The number did no real damage to the GBP but it is the day's weakest performer, down by 0.3% against the USD.

The real damage was inflicted by the Bank of England governor yesterday, in a speech that cost the pound half a US cent in 20 minutes. Speaking of "growing concerns over the global economic outlook" he said trade tensions have increased the downside risk and Trump's tariffs could "shipwreck" the global economy. There was little in the speech that investors did not already know, but their takeaway was that a no-deal Brexit would be bad thing and lead to lower interest rates.


Investors were struck by another bout of nervousness and the JPY was the principal beneficiary, strengthening by 0.5% against the USD. Much of the shine has rubbed off the trade truce, which they held so dear at the weekend. The steady fall in US bond yields narrows their attraction in comparison to similar Japanese issues and 10-year JGBs yielding a negative -0.16% are less costly to own that the equivalent German bonds at -0.39%.

Japan's services PMI this morning came in at 51.9. It was positive, and a little better than the previous month's 51.7, but missed the 52.0 predicted by economists.

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