The market is eagerly awaiting today’s jobs report in the US which should give an indication of whether or not the Federal Reserve will cut rates. Estimates from several polls point to an increase in non-farm payrolls of about 160,000, higher than May’s subdued 75,000. A weaker-than-expected figure will increase the likelihood of a rate cut by the Fed. The US yield curve has been inverted for a full month now, and it being often a precursor to recessions should give momentum to calls for a rate cut. The gap between 10Y treasuries and 3-month bills was at 26bps on Wednesday, close to its most negative level of the year.
The UK’s service sector fell to near stagnation in May according to Markit’s latest survey of UK purchasing managers. The Services PMI went down to 50.1 from 51 in May, its lowest reading in three months. Add to it news that construction and manufacturing contracted in the same month, it appears the British private sector shrank in June. This is the first time the private sector has contracted since just after the EU referendum and Markit’s Chief Business Economist says it points to a 0.1% contraction in the UK’s GDP for the quarter. The pound closed slightly higher against the dollar at 1.2579 while yield on 10Y UKT’s fell to 0.6748%.
Germany’s 10Y bunds fell to a record low of -0.4004%, notably below the ECB’s deposit rate of -0.40% as investors continue to bet on policy easing. Investors are now turning to riskier Italian and Greek notes which are leading the rally in European bonds this week. Governments are taking advantage, with Spain and France selling debt at record-low costs on Thursday. Germany is now part of an ‘elite’ group of countries – the US, the UK, Japan and Canada – that have benchmark bond yields below the key interest rate. The euro closed higher against the dollar at 1.1285.
Stocks in Asia opened on a largely muted note as the market awaited American labour data which is expected to be a factor on the Fed’s decision on interest rates this month. The CSI recovered from its red opening to trade 0.17% higher in the afternoon as did the HANG SENG which was 0.05% up. The NIKKEI in the same manner also gained from its flat opening to trade 0.20% higher in the afternoon. On the trade-war front, White House economic advisor Larry Kudlow said he expects to announce new negotiations soon as the Southern China Morning Post reported that US negotiators will be in Beijing next week to restart trade talks.
The ruling AKP’s plans to submit a draft bill to parliament to allow the government use of central bank cash to help finance its budget deficit are gaining momentum according to persons familiar with the matter. Earlier plans to also introduce with the bill a raise real estate and income levies have been shelved for the time being, however. Also included in the bill will be a proposal to double taxes on foreign exchange purchases by individuals as well as an extension to the so-called wealth amnesty, which allows Turkish citizens to repatriate undisclosed assets with smaller tax liability. The lira continued its rise against the dollar closing at 5.5967 to the dollar while TURKEY 47s closed higher at 86.075.
Brazil’s pension reform bill made notable progress on Thursday after a lower House committee approved it by a 36 to 13 margin, paving way for a crucial first vote in Congress. If passed in the main chamber, the bill will then proceed to Senate for a final vote. The bill is the central pillar to President Jair Bolsonaro’s economic policy and its passage will restore confidence in the South American economy which is facing a technical recession in the second quarter. Leaders in Congress are optimistic the bill will be passed by September. The real closed firmer to the dollar at 3.8021 while BRAZIL 47s closed higher at 107.810.
A second consecutive rate cut is possible at this month’s meeting, Russian central bank governor Elvira Nabiullina said yesterday. Commenting that inflation has been reasonably contained and that pro-inflationary risks are limited for the next year barring any external shocks, she said there is a possibility of a cut in July. A Bloomberg survey is however pointing to the rate being held even as inflation is expected to slow from 5.1% to 4.8% in June. The ruble closed weaker at 63.4645 to the dollar while RUSSIA 47s closed about flat at 112.395.
The Kenyan government received a $750 million loan from the World Bank and has announced that by Q4 they will open talks on another facility. The purpose of these facilities is to support affordable housing, agriculture and other development projects. It is believed that the government will use this loan to implement plans to increase revenue and ease the uptake of debt as they seek to manage debt levels. The yield on KENINT 27s was 6.033% at close of markets on Thursday, while the South African Rand was trading at 14.0511 to the dollar.