Markets
Both US Treasuries and German Bunds lost ground today. US Treasury move can partly be traced back to investors anticipating the US auction. As yesterday, Bunds weren’t able to profit from deteriorating equity markets and ongoing Italian budget concerns. Spill-over effects from the US seem to outweigh the prevailing risk-off in Europe. Italian BTP futures recovered strongly today after opening with a dive after the coalition repeated its budget plans. The BTP was able to pair losses after FM Tria pointed out the budget watchdog approved the government economic forecasts and only had a different view on growth. US PPI’s remain strong with core PPI printing 0.4% (MoM) while only 0.2% was expected. Strong CPI’s tomorrow, well above the Fed’s 2% inflation target, can warrant a continuation of the rate hike cycle. German Bunds ended their rally down and were edging back higher at time of writing. Similar behaviour from US treasuries, but stronger. German yields rose with changes ranging between +0.4 bps (2-yr) and +1.6 bps (10-yr).The US yield curve bear steepens with changes ranging from +0.1 bps (2-yr) to +1.8 bps (30-yr). Spreads over German 10-yr yield remain relatively unchanged, with only Greece making a significant move (-14 bps).
Despite the budget watchdog’s rejection and Tria pressing on with the current budget proposal, Italians tensions receded somewhat. This offered EUR/USD a (temporary) window of opportunity but the pair struggles to retain the 1.15-mark. US headline PPI (2.6% YoY) was close to expectations (2.7% YoY), while the core measure surprised markets. If anything, the data should be dollar supportive. EUR/USD defied market logics though, and trended higher after the release. The couple is currently trading near 1.152. While we saw no apparent reason for this seemingly illogic move, it should be noted EUR/USD’s trajectory was captured within a narrow intraday range. Markets await further Italian intel and tonight’s US auctions which could propel US rates in case of mediocre results.
Sterling’s initial attempt to extend gains in the aftermath of yesterday’s rebound failed. After touching an intraday high at around 0.8723 EUR/GBP, the pound witnessed some volatility, following soft UK data (industrial production and GDP) and Haldane’s speech. The BoE’s chief economist judges inflationary risks as broadly balanced as he sees wage growth picking up, yet in a limited, gradual manner. Sterling’s mood swings were confined to very tight ranges though. Markets are trying to assess whether yesterday’s (and by extension of the past two weeks) brexit euphoria was justified. Tonight’s speech by Michel Barnier to the European Parliament will thus be the focal point. The EU chief negotiator is to present the European proposal for the future UK/EU ties, another theme of discussion in the brexit sage. Markets stay sidelined going into today’s main sterling event. EUR/GBP and cable are changing hands at 0.874 and 1.316 respectively, close to unchanged from yesterday.
News Headlines
ECB Executive Board Member Mersch joined ECB President Draghi in stressing that underlying inflation is about to pick-up in the euro zone because of underlying strength of the economy, the tightening labour market and the ECB’s ample degree of monetary policy accommodation.
Core US PPI rose by 0.4% M/M and 2.9% Y/Y in September, outpacing 0.2% M/M consensus and confirming building inflationary pressures. The headline reading printed at 0.2% M/M and 2.6% Y/Y. Industrial production data from the UK (0.2% M/M) and several EMU countries (France 0.3% M/M, Italy 1.7% M/M) beat consensus in August.
EUR/NOK dropped from 9.50 to 9.45 as headline and core inflation rose faster than forecast in September, respectively by 3.4% Y/Y and 1.9% Y/Y. Inflation readings warrant a continuation of the Norges bank’s tightening cycle which started in September.
