Markets:
Global core bonds eked out some gains today. The move was driven by the Bund with some spill-over effects to the US Note future. Two items played a role. First, rumours suggested that next week’s ECB meeting is too early to change the central bank’s forward guidance. They triggered some short covering on the sell-off inspired by amongst others hawkish ECB Minutes indicating changes to the communication strategy "early 2018". Second, the Berlin SPD chapter is expected to vote against formally starting coalition talks with the CDU/CSU. Following Saxony-Anhalt, it’s the second region who revolts. This weekend’s SPD party convention is crucial. The vote will mainly depend on support from the bigger states like eg North Rhine Westphalia. Going into the US session, core bonds stabilized. The US January empire manufacturing index disappointed, but didn’t affect trading. The German yield curve bull flattens with yields declining 0.4 bps (2-yr) to 5.3 bps (30-yr). The US yield curve flattens with yield changes varying between +0.8 bps (2-yr) and -1.3 bps (30-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany narrowed marginally with Italy (-3 bps) and Greece (-7 bps) outperforming. The Belgium debt agency successfully launched a new 10-yr OLO via syndication (OLO 85 €5bn Jun2028). The bond was priced to yield MS -17 bps. Books exceeded €20 bn.
The euro rally finally faced some headwinds. The single currency dropped half a big figure early in the session on headlines of rising opposition within the German SPD to start formal coalition talks with Chancellor Merkel’s Christian Democratic party. Later in the session, the euro faced additional selling pressure on headlines that the ECB probably won’t change its forward guidance at next week’s policy meeting. The NY empire manufacturing survey was marginally softer than expected, but didn’t hurt the dollar. The US currency maintained its intraday gains against the euro (EUR/USD currently low 1.22 area) and the yen (USD/JPY currently 110.70 area). For now, it is too early to conclude that the USD decline/euro rally is over.
The focus for sterling trading turned to the December UK price data. The report was mixed, but headline CPI declined to 3.0%. Core CPI even dropped to 2.5% from 2.7%. The decline confirms the BoE’s scenario that inflation probably peaked around the turn of the year. It is expected the decline gradually from here. This scenario allows the BoE to keep a very gradual approach on further interest rate hikes in this and next year. The reaction of sterling to the data was very modest. Cable drifted from just below 1.38 to the mid 1.37 area. EUR/GBP initially hovered in the 0.8870/0.89 area as any selling pressure on sterling was countered by broad-based euro softness. Later in the session, additional EUR/USD selling pushed EUR/GBP further south in the 0.88 big figure (currently 0.8865/70 area). For now, the lingering debate on a new Brexit referendum doesn’t help sterling.
News Headlines:
The European Central Bank is unlikely to ditch a pledge to keep buying bonds at next week’s meeting as rate setters need more time to assess the outlook for the economy and the euro, three sources close to the matter said. We think that March is a more likely timing with new growth and inflation forecasts.
The Berlin chapter of SDP votes against starting formal coalition talks with the Christian Democrat-bloc based on result of exploratory talks, Der Spiegel magazine reports, citing Berlin SPD spokeswoman.
European equities extend the established uptrend with most indices gaining about 0.5%. US stock markets also continue their record race supported, amongst others, by strong (underlying) results from Citigroup. The Dow cleared the 26 000 mark. The S&P and the Nasdaq also show gains of up to 1%.
