Markets:
The path of least resistance for core bonds remains south. The German Bund and US Note future slid lower today in absence of market drivers. We stressed before that core bonds hardly profited from disappointing US eco data (ISM manufacturing/payrolls) and from political tensions in the Middle-East (US-Iran) at the start of 2020. Both the US and the German yield curves bear steepen. US yields add 0.8 bps (2-yr) to 2.8 bps (30-yr) while German yields rise by 1.2 bps (2-yr) to 4 bps (30-yr). The European underperformance could partly be related to heavy (expected) bond supply. The EFSF launched a new 30-yr deal today. Germany, Italy and the Netherlands have scheduled auctions while Spain (announced; long 10y), Belgium (rumoured) and Greece may issue via syndication. From a technical point of view, the German 10-yr yield is testing the -0.18% (July high)/-0.15% (38% retracement from Feb ’18 – Sep ’19 downleg) resistance area. 10-yr yield spread changes vs Germany are almost unchanged with Italy (+3 bps) underperforming. The next key moment for core bond yields will be tomorrow’s US CPI inflation print. Both headline and core CPI are expected to rise further above or stabilize above the Fed’s symmetric 2% inflation target. The gap with the central bank’s favorite PCE deflators will than widen to unseen levels with expectations building that the PCE deflator will eventually make a catch-up move higher. First resistance in the US 10-yr yield stands at 1.94%. Trading in EUR/USD was again little animated. The pair changed hands in an extremely thin trading range between 1.1115 and 1.1135. USD/JPY rises from 109.49 to 109.86 in technical-inspired trading after finally taking out 109.73 resistance. A sustained break above 109.93 would imply a fresh trading band capped by 112.31/40.
Sterling suffered losses today following weekend comments by BoE Vlieghe. In an FT article, he pushed for a rate cut if he didn’t see a significant improvement in the eco data. On Friday, BoE Tenreyro also indicated that she could support a rate cut in the coming months. The shift of those two BoE-members mean that BoE Governor Carney’s final meeting (Jan 30) could result in a tight vote. Two out of 9 BoE members (Saunders & Heskel) already voted for a 25 bps rate cut since November. Carney himself recently suggested plenty of room to act to prop up the economy. The UK yield curve bull steepened with yields 5.2 bps (2-yr) to 1.7 bps (30-yr) lower. The market-implied probability of a January rate cut rose to 50%. Gloomy UK eco data (industrial production) added to uncertainty. EUR/GBP rose from Friday’s close of 0.8512 to 0.8562.
News Headlines:
UK data surprised on the downside today. Industrial production fell by 1.2% m/m in November, while consensus counted on a stabilization. Manufacturing output fell by 1.7% (M/M) in November (consensus at -0.2%), partly reflecting car factories closing to avoid supply disruptions ahead of the Oct 31 Brexit deadline. Markets are looking forward to Friday’s retail sales. A weak reading will boost BoE rate cut expectations further.
Czech retail sales defied market expectations and increased by 2.7% (Y/Y) in November while consensus was at 1.9%. The details evidence gains across all segments except for automotive fuel which shrank 1.4% (Y/Y). Inflation also defied expectations and accelerated to 3.2% (Y/Y), up from 3.1% in November, confirming a trend of intensifying price pressures. EUR/CZK holds near the lows around 25.20.
The German government reported a record budget surplus of EUR 13.5 billion in 2019 following stronger-than-anticipated tax revenue and lower interest rate payments. The government faces constant calls to drop its Schwarze Null policy amid an economic slowdown. The record surplus will likely renew calls for increasing public spending to bolster the slacking German economy.
