FED: SOME SENSE OF DEJA VU?

Macroeconomic environment US: disappointing data, with housing starts falling by 12.3% and 2.2% mom, respectively, confounding expectations. Both indicators slumped to 9-month lows. Eurozone: final estimate of June inflation produced no surprises, with headline inflation unchanged at 2% and core inflation at 1.2%. UK: inflation readings surprised on the downside, headline inflation reaching 2.4% (stable compared with May), missing expectation by 0.2pp, while core inflation weakened to 1.9% (down 0.2pp compared with May), when the consensus was for 2.2%. Equities European equity markets up for second consecutive session, fuelled by the technology, chemical and auto sectors, while defensive sectors underperformed. In the US, much was written about the record $5bn fine slapped on Google, but the news was shrugged off, with the Nasdaq largely trendless at the end of trading hours in Europe. After Morgan Stanley Tuesday, it was the six largest UK banks that reported higher-than-expected Q2 earnings yesterday. The VIX pulled back below 12%. Bond markets / Derivatives LCH announced a rise in margins applied to repos on Italian govies , which weighed on peripheral sovereigns. Core sovereigns treaded water, as did US Treasuries, with in both cases a slight underperformance at the long end. As regards implied volatility, euro and dollar surfaces continued to head lower. Money markets / Central banks LCH cleared the first SOFR swaps. Later on, the US 3-month Libor-OIS spread and TED spread declined to 35.4bp and 33.7bp, respectively. The Eonia 5-year basis recovered on Wednesday, touching 11.3, its highest level in one month, whereas the Euribor 5Y 3s6s broke below 7. The SOFR lost 3bp intraday to 1.92%. FX The euro weakened over the course of Wednesday’s session, weighed down by the underperformance of Italian sovereigns, and then by the publication of the June inflation data, which disappointed the markets. The euro pulled back towards 1.1625, even testing 1.16 intraday. Sterling extended its decline, testing 1.30, its lowest level since September 2017, what with the Brexit negotiations getting bogged down. In the face of this bout of weakness, the US dollar was relatively firm against all G10 currencies and emerging currencies. Only the high beta currencies took advantage of the equity markets’ sturdy showing. Commodities Oil was choppy today following mixed data from the EIA. Whereas US crude inventories rose by 5.84mn bbl wow, gasoline inventories fell 3.16mn bbl.