Global core bonds are losing ground today. The US proceeded to raise tariffs on Chinese imports this morning, but the risk-off sentiment of late stabilized overnight. Asian equities were mixed with Chinese indices outperforming as investors remain hopeful that the US and China will eventually agree to some sort of a deal. That wasn’t enough to convince German Bunds as they traded with an upward bias overnight. EU equities jumped higher at opening while ECB’s Hansson sees no need to rush to add stimulus as he foresees that the EMU economic slowdown might finally be passing. German Bunds edged lower, with weak industrial production data in France and Italy having little to no impact. The German yield curve is moving higher with gains up to +1.6 bps (30-yr). After lunch time, risk appetite fled the markets with equities taking a step back and US Treasuries regaining the upward bias in a choppy trading. US President Trump said he’s in no hurry to strike a trade deal with China, suggesting the higher tariffs might stay in place for some time. US inflation data printed little below expectations and caused only a temporary uptick in US Treasuries. The US yield curve is mixed with changes in the range of-0.8 bps (2-yr) to +1.4 bps (30-yr). Peripheral spreads stabilize after yesterday’s widening with Greece (-5 bps) and Italy (-2 bps) outperforming.

EUR/USD initially held most of this week’s gains today. The pair hovered in the 1.1220/35 area for most of the European trading session. US CPI inflation printed slightly softer than expected (headline 2.0% VS 2.1% expected). US (short-term) yields declined marginally and so did the dollar. EUR/USD is trading in the 1.1240 area. USD/JPY is changing hands in the 109. 70 area. (FX) markets are look forward to the next steps in the US-China trade war (retaliation from China this weekend?). For now, the dollar suffers more from the trade war than the euro, probably as markets ponder the chance for Fed rate cuts further down the road.

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The focus on UK markets turned temporary to the eco data today as the ONS published to Q1 UK growth data. The UK economy grew a solid 0.5% Q/Q in the January-March period. Part of this growth was due to stockpiling as companies prepared for the consequences of a (potential no-deal) Brexit scheduled for March 29. However, private consumption also printed strong at 0.7% Q.Q. Even business investment was better/less soft than expected. Last week at the publication of the inflation report, BOE’s Carney indicated that the market underpriced the chances for further rate hikes over the BoE policy horizon. Today’s Q1 GDP report supports this BoE narrative. However, sterling traders were not impressed. Sterling was unmoved. EUR/GBP is still trading in the 0.8630 area. Investors apparently assume that Brexit uncertainty will oblige the BoE to remain sidelined for quite a while. One can also raise the question how much room there will be for the BoE to raise rates in e.g. in 2020, if other central banks might consider easing policy to counter a slowdown in growth at that time. Cable gained a few ticks on USD weakness (1.3025 area).

News Headlines

The April Canadian labour market report surprised friend and foe. Net job creation amounted 106.5k, nearly tenfold of what was expected and the highest on record. Details showed a significant increase in especially full time (+73k), but also part time (33.6k) jobs. The unemployment rate fell to 5.7%, the lowest this year, despite an unexpected increase in the participation rate (65.9%). Average hourly wages rose faster than forecast (2.6% Y/Y vs 2.3% Y/Y). The Canadian dollar surged after the report, pulling USD/CAD below 1.34.

US April CPI inflation fell shy of forecasts. Headline inflation rose by 0.3% M/M and 2.1% Y/Y while the core gauge printed at 0.1% M/M and 2% Y/Y. Lower used-car and apparel costs played a role. The data align with the Fed’s view to stay sidelined as last year’s feared inflation pick-up didn’t occur.


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