Global core bonds lost ground today with US Treasuries underperforming German Bunds. Global core bonds opened today’s session with a neutral bias. German Bunds edged lower as European investors chose riskier assets over safe haven paper. Around the publication of the mixed ZEW Survey (see below) and stronger February EMU construction output, Reuters reported that a “significant minority” of ECB officials expressed doubts that the eurozone economy will rebound in the second half of the year. The German Bund jumped higher. However, German Bunds paired gains after ECB officials were said to lack enthusiasm for tiering of negative interest rates. The German yield curve is mixed with changes varying between -1.1 bp (2-yr) and +0.3 bps (10-yr). US Treasuries moved sideways throughout EU dealings, but lost ground ahead of the US opening as strong corporate earnings are lifting sentiment. US factory output for March little disappointed, putting a floor under UST’s for now. The US yield curve edges higher with the belly of the curve underperforming the wings, with changes up to 2.3 bps (10-yr). Bank of Italy chief economist Eugenio Gaiotti warned that Italy’s budget deficit would rise to 3.4% in 2020 if the government won’t increase the VAT. Italian BTP futures fell, pushing the Italian spread over the German 10-yr yield back to 255 bps (+4 bps).

A strong Asian trading session set the tone for this morning. European stocks moved swiftly higher. The constructive risk climate also supported euro buying. However, Reuters reporting that several ECB officials doubt the long projected growth recovery in the second half this year dented sentiment. Shortly after, Bloomberg reports suggested that there’s little enthusiasm within the ECB to introduce a so-called tiered deposit system to counter the side effects of sub-zero interest rates. It might mean markets projected the ECB’s “lower for even longer” too far into the future. EUR/USD was whipsawed but eventually turned south despite investor optimism and weaker than expect US industrial data. The couple struggles to hold ground above the 1.13 handle. USD/JPY hovers close to 112.

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Sterling’s price action was again confined to a tight trading range today. Brexit temporarily moved to the background as British MP’s are enjoying their Easter holidays. We looked for UK’s February job report to provide impetus to trading. Readings were strong (179 000 jobs created, unemployment rate at 3.9% and wage growth at 3.4% YoY) yet too close at consensus to trigger any significant market moves. At the same time the bar for sterling to post additional (data driven) gains has risen dramatically over since the start of the year. EUR/GBP is currently testing the upper side of the narrow sideways range at 0.865. Cable manages to stay below 1.31 (1.3060 at the moment).

News Headlines

Reuters cites four sources with direct knowledge of ECB discussions who say that several ECB policymakers think the bank’s economic projections are too optimistic as growth weakness in China and trade tensions linger. The “significant minority” thinks that the long projected growth recovery won’t be coming in the second half of the year.

German ZEW investor sentiment weakened further in April, declining to 5.5 from 11.1 (vs 8.5 expected). It’s the 7th consecutive monthly drop to the lowest level since 2014. The forward looking “expectations” component did improve though, rising for a sixth consecutive month from -3.6 to 3.1. It’s the first positive figure since March 2018.

The UK unemployment rate was unchanged at 3.9% in February, the lowest level since 1974. The UK economy added 179k jobs in the 3 months to February, with woman accounting for 80% of the increase. Average weekly wages, excl. bonuses, rose 3.4% over the same period (3M Avg Y/Y), matching the fastest pace since the end of 2008.


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