Markets
Global core bonds lost ground today with US Treasuries underperforming German Bunds. Yesterday’s risk-rebound received a push in the back overnight as US Congress reached a tentative border security deal that, if approved later this week, might avoid another government shutdown. Both US Treasuries and German Bunds took a step back on the news. ECB’s Philip Lane warned against overreacting to individual data points but said the domestic euro-area economy remains “pretty strong”. The Bund temporarily rebounded on a headline from Germany’s Weidmann, but the move didn’t last. ECB member Knot said that recession fears for the euro zone are “clearly premature” and that the current wait-and-see approach is the right attitude for the ECB. The German yield curve moves higher with changes up to +1.2 bps (30-yr). The preliminary US Congress deal on border security and positive signals from the White House on the US-Sino trade talks pushed US Treasuries down with a rebound ahead of the US bell. The US yield curve edges higher with changes ranging from +1.6 bps (2-yr) to +2.7 bps (10-yr). Peripheral spreads over the German 10-yr yield tighten with Greece (-7 bps) and Italy (-5 bps) outperforming.
The EUR/USD slide (rise of the dollar) slowed temporary this morning even as US Congress reached a (tentative) budget deal overnight. A positive risk sentiment prevented further EUR/USD losses. Euro selling resumed early in European dealings on headlines from ECB’s Weidmann. Markets made a dovish reading of his assessment that the euro zone hasn’t yet reached the stage of being ‘crisis proof’. EUR/USD set a minor short-term correction low in the 1.1260 area. However, the overall message from Weidmann wasn’t that dovish. The euro (and EMU yields) gradually rebounded. Comments from ECB members Knot and Nowotny also weren’t overly dovish. A further improvement in global risk sentiment also provided a good reason for short-term investors to take some profit on the recent USD rally. Interest rate differentials between the US and Germany/EMU widened slightly, but this time it didn’t help the dollar. EUR/USD is heading back up to the high 1.12 area. Even USD/JPY (110.45 area) pairs part of recent gains, despite the broader risk rally. The USD rally took a breather, but the overall picture remains USD constructive.
Sterling trading remained mostly technical in nature today. EUR/GBP trended slightly higher this morning as markets were looking forward to PM’s Brexit update in Parliament. As expected, the UK PM asked more time to reach a solution with the EU on the Irish border backstop (in one way or another, preferably in by changing the withdrawal agreement). BoE’s Carney in a speech warned on the risk of trade tensions (incl. Brexit) for global growth but kept a balanced approach on the BoE’s intentions on monetary policy. EUR/GBP reversed this morning’s gain and is currently again trading in the 0.8765 area.
News Headlines
Hungarian headline inflation stabilized at 2.7% YoY (0.3% MoM) in January. Core measures however, rallied to 3.2%, (vs. 2.8% in December). Core inflation as measured by the country’s central bank (MNB) quickened to 3% vs. 2.9% in December. MNB deputy governor Nagy recently said a reading of 3% would be a “very strong indicator for monetary policy that normalization can start”. The forint rallied on such prospects.
France’s finance minister Le Maire seeks to overhaul EU competition laws with support of Germany. Le Maire says the bloc’s industrial policy needs to be “much more ambitious” and aimed at creating global champions to face US and Chinese competition. Le Maire’s comments come after the EU vetoed a German-French rail merger.
ECB’s Weidmann said in a speech the EMU is going through a “soft patch” but sees “good reasons” to believe inflation is still on track toward the 2%-target. Nowotny spoke later and suggested the ECB will revise its plans for interest rates “in the summer”. Dutch governor Knot thinks the ECB’s wait-and-see approach is “probably the optimal attitude” but dismissed EMU recession talks. He added the ECB has to be patient and is “not yet there” when it comes to new stimulating measures.
