Global core bonds gained ground today with US Treasuries outperforming German Bunds. Recent uptick of risk sentiment, bolstered by a dovish tone from the Federal Reserve and hopes for a breakthrough on the US-Sino trade negotiations, came under pressure. European equities edged lower after a higher open. Disappointing industrial production results in both Italy and Spain supported the shift to less risky assets. German Bunds immediately moved higher after EU openings. After temporarily trimming those gains, the German Bund currently hoovers back near the intraday high. The German yield curve moved lower with changes in the range of -0.1 bp (2-yr) to -2.4 bps (10-yr). US Treasuries edged higher, too. The move higher was extended when US investors joined the debates. The only eye catcher on today’s economic calendar, US inflation, fell for the first time in 9 months (on a monthly basis) but was spot on market expectations. The US yield curve edges lower with the belly of the curve outperforming the wings. Yield changes vary between -2.9 bps (30-yr) to -4.5 bps (10-yr). Italy tested investor appetite today with a first bond auction of the year. It passed by quiet smoothly with an increase in demand for two of the three tenors sold. Italian BTP’s little outperformed German Bunds.

The dollar initially stabilized today, holding a rather tight intraday trading range. There was no additional news to extend the USD decline that started late last week as Fed’s Powell indicated that the Fed was turning more cautious on further policy normalization. There were few eco data in Europe today.US December CPI inflation was bang in line with expectations. At the same time, the rebound of risky assets which was a driver of USD softness earlier this week, did run into resistance. Initially, it looked that major USD cross rates would go nowhere ahead of the weekend. However, finally some USD short-covering kicked in. EUR/USD dropped back below the 1.15 handle. The intraday rebound of USD/JPY is more modest. The pair is trading in the 108.50 area.

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There were plenty of UK eco data. Growth in the three months to November slowed to 0.3% Q/Q. Activity in the services sector and in the construction held up rather well, but November production data were very poor, showing negative growth for the manufacturing and industrial sector. The UK trade deficit was also wider than expected. Overall, the data painted a grey picture in the UK economy as uncertainty on Brexit grows. As was mostly the case of late, sterling traders largely ignored UK data. The focus remained on next episode in the Brexit sage. The political bickering in the run-up to Tuesday’s vote in parliament continues. Sterling gained some ground on rumours that the UK government will seek to delay the exit beyond 29 March, if PM May’s deal would be rejected next week. The government denied the rumours, but sterling maintained its intraday gains. This afternoon, the correction of EUR/USD also weighed on EUR/GBP. EUR/GBP returned below 0.90 (0.8975 area). Cable is changing hands near 1.28.

News Headlines

US December CPI came in at 1.9% YoY (-0.1% MoM) down from 2.2% last month and the lowest since August 2017. The move is mainly the result of the drastic decline in oil prices recently. Core measures closed 2018 stable at 2.2% YoY (0.2% MoM). The data matched market estimates.

Sweden is close in breaking the political stalemate that governed the country since the elections four months ago. Prime minister Löfven’s Social Democrats reached a deal with the greens and with the Center Party and Liberals, thereby breaking up the now former center-right bloc. The deal is subject to approval by the parties this weekend. The official vote in parliament is scheduled next Wednesday.


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