Markets:
US and European bonds came again under modest pressure today. Strong EMU PMI’s suggest that the economic expansion continued at the start of 2018, weighing on European bonds. At the same time the 10-yr Note future also drifted back south after yesterday’s rebound. There was no high profile US economic news. However, fear for a protectionist battle between the US and its trading partners might have been a negative for Treasuries. US Treasury Secretary Mnuchin applauding the decline of the dollar and Commerce Secretary Wilbur Ross indicating more action to protect American exporters raised the odds for a confrontation between the US and its main trading partners, including China. The jury is still out, but growing tensions between the US and China might question the PBOC’s preparedness to hold the current huge portfolio of US Treasuries. US bond yields rise between 2.7 bps (2-y) and 4.4 bps. German yields increase between 0.1 bp (2-y) and 2.7 bps (10-y).
The USD decline accelerated today. Recent protectionist actions/rhetoric of the Trump administration are an additional negative for the US currency. In this respect, US Treasury Secretary Mnuchin further undermined confidence in the dollar as he indicated that the decline of the dollar was good for US trade. Mnuchin formally repeated the US mantra of a strong dollar in line with economic fundamentals over time. However, this sounds ever less credible. EUR/USD jumped to the 1.2350 area and remained under upward pressure later in the session. The EMU January PMI’s were again very strong, but hardly impacted FX trading. Dollar weakness prevailed. Initially, intraday declines in the likes of EUR/GBP, EUR/AUD, EUR/JPY even suggested that the euro should not per se be the forerunner to profit from current USD decline (admittedly the moves were largely reversed later). Whatever, protectionist action from the US is becoming an ever bigger source of USD nervousness. Trump’s speech in Davos on Friday might be at least as important for the fate of the dollar (and EUR/USD) than tomorrow’s ECB meeting. EUR/USD trades in the 1.2375 area. USD/JPY is drifting lower in the 109 big figure (currently109.40).
Sterling was an outperformer against an overall weak dollar. Cable already filled offers in the high 1.42 area. The rise of sterling was supported by a good UK labour market report. Job growth in the 3 months to November was again strong, easing concerns after a poor figure last month. At the same time, sterling was supported by relatively soft comments from Brexit Minister Davis. He told UK lawmakers that the UK might initially stay closely aligned to the EU’s regulatory framework. EUR/GBP is trading in the 0.8725 area. So the key 0.8690 support is coming within reach.
European equities show modest losses of the order of 0.25%/0.50% as the sharp decline of the dollar weighs on the region’s exporters. US equities open again with modest gains of 0.2% to 0.4% . This time the Dow outperforms.
News Headlines:
"A weaker dollar is good for us as it is related to trade and opportunities," US Treasury Secretary Mnuchin told reporters at the World Economic Forum in Davos.
EMU businesses had a much better start to 2018 than expected, ramping up activity at the fastest rate since the middle of 2006, the composite PMI showed. The EMU index jumped to 58.6 this month from 58.1. The upturn was driven by a strong performance in the bloc’s dominant service industry, where new business flooded in at a rate not seen in over a decade.
The British Office for National Statistics said the number of people in work rose by 102k in the 3 months to Nov. taking employment to a record 32.2 mn. The figures went some way to alleviating worries that Britain’s labour market was running out of steam. Earnings, ex. bonuses, rose by 2.4% Y/Y, the biggest increase since Dec 2016.
