The ECB yesterday as expected kept the parameters of monetary policy unchanged. Chair Lagarde confirmed the economic assessment from March. The short-term picture is still clouded by ongoing containment measures against the new corona wave, which possibly resulted in negative growth in Q1, but the accelerating roll-out of vaccinations suggests better times ahead. The ECB will continue PEPP purchases at a substantially higher pace this quarter compared to Q1. A re-evaluation whether this should continue will only take place when new forecasts are available at the June meeting. The debate on tapering the PEPP program is no topic yet. European yields and the euro trended cautiously higher in the run-up to the ECB decision/press conference but the move was (at least partially) reversed once the ECB press conference was finished. German yields closed the session up to 1 bp higher (10-y). Later, gyrations on US stock markets also affected US bond markets. US President Biden announcing a higher capital gain tax reversed gradual intraday comeback of US equities with major US indices closing about 1.0% lower. The equity correction also resulted in a bull flattening of the US yield curve with yields declining up to 3.25 bp (30-y).EUR/USDclosed marginally lower at 1.2015, mainly unwinding pre-ECB gains. The trade-weighted dollar DXY finished at 91.33 (open 91.11), but USD/JPY kept its gradual downtrend (close 107.97). Sterling was in correction modus. EUR/GBP again tested the 0.87 barrier, but an upside break failed.
Asian equity markets show a mixed picture after the WS correction yesterday with China outperforming and Japan underperforming. The dollar is modestly lower even as US yields show tentative signs of bottoming. USD/JPY is trading near 107.90. EUR/USD rebounds to 1.2025. The yuan is taking a breather after recent rally (USD/CNY 6.4960). Aside from USD softness, the Aussie dollar is supported by solid PMI data (AUD/USD 0.7735).
Today, the preliminary EMU and US PMI’s will be published. For the EMU PMI’s a slight loss of momentum is expected after the instruction of new corona containment measures in several countries end March/early April (EMU composite expected at 52.9 from 53.2). Recently, markets often looked through short-term gyrations in the as they mainly assessed the balances between vaccinations and virus contained measures. So, better vaccination prospects might prevail if the data avoid a huge negative surprise. US PMI’s are expected to signal a further solid expansion (61+). On the interest markets, the US 10-y yield is holding below the 1.58% previous support, but the downside momentum shows tentative signs of easing. The German 10-y yield is holding the ST -0.30% and -0.20% corridor. The -0.20%/-0.14% area remains strong resistance. After a protracted decline earlier this month, the dollar (DXY, EUR/USD) this week stabilized, but there is no sign of a sustained rebound yet. For EUR/USD, first topside resistance comes in at 1.2080/90. A break blow 1.1990/43 remains necessary to call off recent upward EUR/USD bias. Sterling also fell prey to profit taking this week, but EUR/GBP still failed to regain the 0.8731 level necessary to improve the EUR/GBP technical picture. UK March retail sales this morning beat the consensus by a big margin (headline sales 5.4% M/M and 7.2% Y/Y, versus 1.5% and 3.5% expected). UK PMI’s are due later today.
US President Biden is preparing a series of tax increases on the more wealthy Americans to fund what the so-called American Families Plan. It is Biden’s third proposed economic package, after the $1.9tn stimulus deal in March and the still-discussed $2tn infrastructure bill. Among the floated tax raises are an increase in the top income tax rate from 37% to 39.6%. The Biden administration also looks to equalize the capital gains tax rate to the one on ordinary income and considers to increase payrolls taxes on the wealthiest Americans.
Russia said it will begin withdrawing thousands of troops from areas near the Ukrainian border starting today. The country has amassed as many as 100 000 troops as well as military equipment in recent weeks in a move that soared tensions with Ukraine and its Western allies. Fearing sanctions, the Russian ruble, sovereign bonds and CDS came under fierce selling pressure but reversed course after Russia’s announcement. USD/RUB fell from 76.58 to 75.42.