Markets

•          The absence of a meaningful economic calendar and US investors (Labour Day) resulted in uninspired trading at the start of the new month. Lingering legal concerns may have weighed on the dollar. They include Fed governor Lisa Cook’s case as well as a US appeals court’s ruling late Friday. The latter states that Trump overstepped his executive powers in using the 1977 International Emergency Economic Powers Act to impose amongst others the fentanyl and the reciprocal tariffs. The court allowed the IEEPA tariffs to remain in place through October 14 and the US administration will appeal to the Supreme Court in the meantime. The greenback lost ground against most major peers but closed above the intraday lows nevertheless. DXY eased to 97.77. EUR/USD was unable to hold the 1.17 into the close. European stock markets finished with slight gains, as did European yields. The German curve bear steeped with net daily changes between 1.5 bps to 2.4 bps. The French OAT/swapspread, in focus as PM Bayrou’s minority government faces near-certain defeat in next Monday’s confidence vote, stabilized near the recent highs.

•          US Treasury cash markets reopened in this morning’s Asian dealing with slight losses. The belly underperforms with yields adding around 3-3.5 bps in the 5-10yr bucket. Japanese yields (ex ultralong maturities) ease a few bps after a 10-yr auction drew the biggest demand in almost 2 years. The real test occurs later this week though, with Thursday’s 30-yr sale in focus. The dollar has a slight edge over its G10 peers. Legal issues (Cook, US tariffs) and politics (France) aside, the economic calendar is to flavour the trading session today. The US kicks off its lengthy economic update with the US manufacturing ISM gauge. It’s market importance is less than that of the services counterpart (Thursday), especially against the backdrop of other critical data points, including the payrolls, up for release this week, but it is nevertheless worth mentioning. Consensus expects a marginal improvement to a still below neutral 49 (from 48). The employment component is at the center of attention since Powell’s dovish pivot at Jackson Hole. Any labour market related weakness is likely to raise bets for Fed cuts, pressuring front-end yields and the dollar. We consider the bar to price out monetary easing, particularly for September (+/- 90% discounted), to be very high. European inflation numbers, seen at 0.1% m/m and 2.1% y/y, should come with little surprises after the national readings published over the last few days.

•          US Treasury Secretary Bessent told the Washington Examiner that the Trump administration may declare a national housing emergency in the fall. He added that it would be a critical leg of Republicans’ 2026 mid-term election platform. Bessent said that the government is still trying to figure out what they can do without stepping into the business of local governments. Deregulation and environmental rollbacks (eg opening up federal land for housing development) could be part of the action plan. Other mechanisms might include federal funding mobilization or public-private partnerships. The dovish pivot of Fed chair Powell could also improve affordability via a more neutral monetary policy, though the jury is still out whether this will impact the (mortgage-related) very long end of the US yield curve.

•          The Association for Financial Markets in Europe calls in a new report on capital markets to relax cross-border regulations. AFME Pankas said that “banks operating cross-border within the union are suffering significantly from revenue declines due to a fragmented approach causing capital and liquidity to be locked up.” AFME estimates that national banking markets lock up €225bn of capital at big lenders. The ECB earlier estimated that about €250bn of liquid assets can’t move freely withing the banking union because of local regulations dating back to the aftermath of the financial crisis. The industry lobby also points to a deregulation swing by US and UK regulators which further harms the competitiveness of European lenders. It also refers to consistent decline of cross-border mergers between EU banks over the last two decades, limiting consolidation and efficiency gains.

Graphs

German 10-year yield

Confidence that inflation is returning to 2% allowed the ECB to reduce to policy rate to 2%, reaching neutral territory. The ECB moved to an outright data-dependent approach, but overall uncertainty remains elevated. German bunds ever more gain safe haven status as uncertainty with respect to US assets intensifies. This slowed the rise in LT yields with market focus fluctuating between tariff wars to public finances.

US 10-year yield

The Fed’s priority stays on inflation until the labour market is visibly weakening. Downward revisions in the July payrolls report boosted odds that the September FOMC meeting could be a tipping point. LT bond yields’ trend higher on President Trump’s big, beautiful, deficit-increasing bill recently stalled on growth concerns. This flip-flopping between the fiscal and economic theme is here to stay.

EUR/USD

Trump’s explosive policy mix (DOGE, tariffs, big beautiful bill) triggered uncertainty on future US economic growth and sustainability of public finances with markets showing a loss of confidence in the dollar. EUR/USD is in a buy-the-dip pattern on track with a medium term target at 1.2349. The end to the ECB’s easing cycle and German/European spending plans help the euro-part of the equation.

EUR/GBP

Long end Gilt underperformance due to fiscal risks weighed on sterling earlier this year. The Bank of England is on a quarterly 25 bps cutting cycle since August of last year (4% policy rate currently), with next action expected in November. EUR/GBP tested the November 2023 high at 0.8768, but a break higher didn’t materialize (yet). 

Calendar

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