Markets

Global core bonds are edging lower today. After a drop yesterday, core bonds stabilized during Asian trading hours. Sentiment soured overnight as weak Chinese manufacturing PMI’s added to concerns over slowing global growth, while US President Trump abruptly left the negotiation table with North Korea without a deal. US Treasuries rebounded cautiously, while German Bunds lost additional ground. EMU CPI readings printed little below, but close to, expectations and had little impact on trading. The German yield curve is bear steepening with changes up to +2.3 bps (30-yr). US Treasuries upheld a slightly upward bias throughout the day as the US/NK talks ended unexpectedly and investors awaiting a full eco calendar. US Q4 GDP growth printed above expectations (2.6% ann. vs 2.2% exp.) and so did the Core PCE inflation gauge (1.7%, Q/Q vs. 1.6% exp.). US Treasuries fell lower, dragging other core bonds with it. The Chicago Purchasing Manager index for February printed strong too (64.7 vs. 57.5 in January). The US yield curve edges higher with changes from +0.3 bps (30-yr) and + 1.9 bps (5-yr). Peripheral spreads over the German 10-year yield tighten today with Italy (-4 bps) and Greece (-6 bps) outperforming.

The ‘returned-to-Europe trade’ continued today and propelled EUR/USD above the 1.14 handle. Global sentiment turned more cautious as the meeting between US President Trump and North Korean Leader Kim Jong Un ended abruptly without an agreement, but this global topic had only a modest impact on European markets. European inflation data were mixed and are still quite far away from the ECB ‘s 2% target. Still, markets see signs of a potential bottoming both in EMU activity and inflation, supporting recent tentative rise of European yields and of EUR/USD. EUR/USD traded north of 1.14 going into the publication of the US Q4 GDP report. US Q4 growth (2.6% QoQa) was stronger than expected and so was the core PCE inflation. Later, the Chicago PMI also surprised the consensus by a significant margin. The dollar rebounded, but EUR/USD maintained most of recent gains. Interest rate differentials between the US and Germany are still narrowing in a daily perspective. EUR/USD is trading in the 1.1385 area. USD/JPY profits from the US data and from the rise in core (US & EMU) yields. The pair returned north of 111.

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Recent GBP rally did run into resistance after yesterday’s Brexit votes in the UK Parliament. Today, sterling fell prey to modest profit taking. High profile Brexit headlines are receding as backstage negotiations between the UK and the EU continue. In an ideal scenario, this process should lead to an approval of a Brexit deal in the UK Parliament on March 12. Chances on a no deal Brexit diminished substantially, but all event risk isn’t out of the way yet. With some good news discounted, ST sterling longs took some chips off the table. EUR/GBP rebounded and is trading in the 0.8575 area. Cable dropped below 1.33.

News Headlines

Swedish GDP growth beat 0.6% Q/Q forecast in Q4 2018, rising by 1.2% Q/Q and coming from a minor decline in Q3 (-0.1% Q/Q). Details showed contributions from consumption, net exports and government expenditure while investments declined. Strong January retail sales furthermore suggest an extension of momentum in Q1 2019. EUR/SEK fell back below 10.50 as data strengthen the Riksbank’s case for a second rate hike in H2 2019.

US 2018Q4 GDP beat expectations and grew a solid 2.6% QoQa vs. 2.2% expected. Private consumption proved the strongest driver of growth (adding as much as 1.92% points), followed by a recovery of business investment (0.62% points). Growth impact of inventories (+), government spending (+) and net exports (-) was negligible. Q4 core PCE increased a tad to 1.7% QoQ (vs. stabilization at 1.6% expected).

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