Yesterday was no different from any other day this week. Investors tapered bets on the reflation trade, in part following tame January CPI figures in the US on Wednesday which showed momentum in the real economy has yet to pick up. That said, yesterday’s US jobless claims, both initial and continuing, showed a mixed picture, highlighting the ongoing yet fragile labour market recovery. In the EMU, the European Commission Winter forecasts painted a mixed picture, lowering growth for this year but boosting 2022’s. The direct impact of both the data and forecasts was limited. European stocks trended higher with the broad EuroStoxx600 about 0.5% higher. Wall Street rebounded from intraday lows to end up to 0.4% higher (Nasdaq). US Treasuries underperformed the Bund as the US30-yr bond auction weighed. The auction took place with US equities near their intraday low, partly explaining the weaker metrics that included a 1bp tail (largest in a year), the lowest bid-to-cover since August and a decline in amount awarded to indirect bidders. US yields rose 0.2 bps (2-yr) to 4.3 bps (30-yr). German yields fell up to 2.1 bps (10-yr). Italy (spread -3 bps) remains the outperformer on the peripheral bond market. The dollar fluctuated around opening levels. EUR/USD ended slightly higher at 1.213. The trade-weighted DXY finished close to 90.4. USD/JPY eked out a gain to 104.75. Sterling was one of the underperformers amid rising Brexit tensions related to trade in financial services and the implementation of the deal in Northern Ireland. EUR/GBP rose from 0.876 to 0.878.
Even more Asian markets are closed today, providing little insights in today’s market sentiment. Core bonds trade flat (Bund) with a small upward bias (USTs). The dollar holds the (very small) upper hand over G10 peers.
We don’t expect too much from today’s trading session. From a data perspective, the US U. of Michigan consumer confidence (February) is due. Consensus expects a small rise, extending a gradual but very bumpy recovery. The stalled reflation trade will be the dominant factor however and is likely to continue going into the weekend. That would conclude a week void of trading impetus but full of hesitation and pondering the way forward. Core bonds’ downside might be well protected. We hold a neutral view on the dollar which has been in a softer spot all week. EUR/USD is holding north of 1.21 but isn’t seen breaching any technically relevant areas today. UK Q4 growth came in better than expected this morning, rising 1% q/q vs 0.5% expected and bringing the yearly figure on -7.8%. Growth was boosted significantly by government spending (6.4% q/q) as well by an unexpected increase in capital expenditures (2.1% q/q vs. -1% expected). Net trade weighed on the figure as well as private consumption (-0.2% q/q). Sterling’s reaction was fairly limited. EUR/GBP remains near the upper band of the downward trend channel close to 0.88. As long it doesn’t push through, sterling holds the technical short-term advantage.
The Central Bank of Mexico as expected cut its policy rate from 4.25% to 4.0% even as inflation recently stayed above the 3.0% target. Annual headline inflation decreased from 4.09% in October to 3.54% in January 2021. Core measures declined from 3.98% to 3.84%. “The pandemic has implied significant changes in relative prices, which have exerted upward pressures on merchandise inflation and downward pressures on services inflation, which registered 5.41% and 2.13%, respectively”, the policy statement said. The bank expects core inflation to return to 3% by Q3. The Mexican peso’s reaction to the decision was limited. USD/MXN currently hovers around the 20.00 pivot.
In an online vote, the members of the Italian Five Star movement, the biggest force in the Italian Parliament gave its support for former ECB president Draghi to lead a new government. The government will have to give strong emphasis on green policies. With the support of the 5SM Draghi has now broad-based support across the political spectrum. He might present a list of Ministers to President Mattarella as soon as today and propose a policy programme in Parliament next week.