July 12, 2019 / 8:27 AM / 5 days ago

Daily Briefing: Euro zone output eyed for signs of life

LONDON (Reuters) - Euro zone industrial production data for May due this morning could be an important trigger for the European Central Bank to move further along the easing path, with economists split on whether the numbers will reveal any meaningful signs of recovery.

FILE PHOTO: An employee of German car manufacturer Porsche works on a sports car at a factory in Stuttgart-Zuffenhausen, February 19, 2019. REUTERS/Ralph Orlowski

There was broad divergence in the estimates retrieved by Reuters, with the most optimistic eyeing a 0.9% monthly rise and the most pessimistic seeing a fall of 0.5% — the same outcome as in April.

But already the question is starting to appear more “when” than “if” the ECB will deliver more stimulus, with minutes from its June meeting signalling a readiness to act if needed to counter the growing uncertainty in the global economy.

After being criticised for failing to support for Britain's ambassador to Washington in a diplomatic row with Donald Trump, UK premiership front-runner Boris Johnson last night vowed to stand up for Britain's diplomats around the world.

Some will question the sincerity of the promise given that it comes after the envoy in question felt moved to resign; for Johnson, the important thing is that this does not blow up into anything that could harm his standing with Conservative party members due to choose the UK's next prime minister.

In a wide-ranging interview with the newspaper La Stampa this morning, Italian Economy Minister Giovanni Tria has suggested Rome wants to work with France and Italy to reform the European Union's rules setting out limits on budget deficits.

It’s not clear yet what the chances of any real reform could be and, given the current jobs merry-go-round in Brussels, it could be months before it is.

MARKETS AT 0655 GMT

A retreat by government bond yields and record closes for Wall Street stock indices set the upbeat tone on world markets Friday. Investors are reckoning signals from Federal Reserve Chair Jerome Powell this week point to a quarter-point cut later this month and no more.

Rising core U.S. consumer price inflation for June added to that sobering of the bond markets, with European Central Bank minutes from its most recent meeting considered vague on its next policy steps even if they signalled more easing was possible.

Ten-year U.S. Treasury yields held above 2.1% after climbing to their highest in almost a month overnight, with the yield curve between three months and 10 years close to zero and even briefly turning positive for the first time since May.

The S&P 500 set a record close, just below 3,000. The ViX volatility gauge remained subdued below 13%. In Europe, 10-year German government bonds were set for their biggest weekly selloff since February 2018 on Friday on worries the recent pessimism may have been overdone.

ECB board member Benoit Coeure’s remarks on Thursday suggesting the ECB is not as pessimistic about lagging inflation as the market also pulled bund yields further off record lows. Although it remains negative, the bund yield reached its highest in three weeks.

The dollar remained weaker. With the Chinese monthly health check due later today with the release of June trade data – before Monday’s second-quarter GDP report and June industrial and retail readings – Asian markets were relatively buoyant. Shanghai, Hong Kong, Japan and Seoul were all higher.

The latest tweets from U.S. President Donald Trump were downbeat on the U.S.-China trade progress, although market worries are now shifting to deteriorating trade relations with Europe.

European stock futures were higher, although they cut earlier gains after carmaker Daimler (DAIGn.DE) warned that its second-quarter earnings would be below expectations.

Daimler fell 3% in pre-market Frankfurt trade and shares in VW and BMW were down 3%. The news is likely to reinforce worries about the second-quarter earnings season and follows auto-related warnings this week from BASF, Geely, Johnson Electric, Sensirion, Aumann and Vishay. All have mentioned declining auto demand in their statements.

Earlier this morning, EMS Chemie, the Swiss chemicals and polymers company, said it had seen a “significant worsening” of the consumer and investment mood in China and Europe, inventory stocks were reduced and the auto industry in particular showed a “substantial” decline.

Weak profits from Yaskawa Electric, a Japanese motion control equipment maker with exposure in China, is likely to underscore concern about weakening demand from the world’s second-largest economy as investors await this morning’s trade and credit data.

Emerging-market shares were higher before the Chinese data, amid worries over Sino-U.S. trade tensions but hopes of a Fed rate cut this month. China blue-chip shares rose 0.9% before the morning data. The yuan was broadly unchanged.

South Korea's won dipped 0.4%, but its stocks index closed up as a trade row with Japan festered. The Thai baht fell after the country's central bank clamped down on speculative foreign inflows to stem gains in Asia's best-performing currency this year.

— A look at the day ahead from European Economics and Politics Editor Mark John and EMEA markets editor Mike Dolan. The views expressed are their own —

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