Markets:
The global core bond sell-off accelerated today. German Bunds underperformed US Treasuries. The move was mainly technical in nature. US yields pierced through key resistance levels last week (2.42% for 5y and 2.64% for 10y), creating space for further gains. Good spending/income data and in-line-with consensus PCE inflation had no specific impact. An attempt to go through similar resistance in German yields failed last week, but today’s attempt succeeds. The German 2y yield moves above -0.55%, the 5y yield above -0.05% (first time in positive territory since the end of 2015) and 10y yield above 0.62%. Last week’s upbeat economic assessment by the ECB and subtle hint towards a mid-2019 rate hike still resonate cross markets. Dovish comments by ECB chief economist Praet couldn’t change the tide. Intraday changes on the German yield curve range between +2.2 bps (2y) and +5.5 bps (10y). US yields add 1.6 bps (2y) to 3.5 bps (10y). 10y yield spread changes vs Germany are nearly unchanged with the periphery outperforming (-4 bps).
The dollar finally bottomed at the end of last week and this process continued today. There was little highly profile news to explain the move. The laws of gravity are again weighing more on USD/JPY than on USD/EUR. There was no one-on-one link between the USD’s performance and interest rate differentials. Even so, we have the impression that the environment of higher yields (with US and EMU yields breaking beyond key levels) is becoming again a bit more supportive for the USD. Investors might also turn a bit more cautious on USD shorts going into Wednesday’s Fed meeting. EUR/USD trades currently in the 1.2360 area. Soft comments from ECB Praet helped the euro correction. USD/JPY underperforms other USD cross rates. The pair doesn’t succeed any further gains beyond Friday’s late session ‘spike’.
The recent sterling rally lost momentum at the end of last week. Investors grew less convinced that Brexit negotiations could go rather smoothly. There was plenty of noise on a flaring up of internal opposition against PM May within the Conservative Party. The House of Lords also sees some ‘fundamental flaws’ to the UK Brexit law. EUR/GBP rebounded north of 0.88 this morning, the move was reversed later, at least partially driven by the overall correction of the euro. EUR/GBP trades little changed in the 0.8775 area. The correction of cable continues. The pair trades in the high 1.40 area (compared to a top of 1.4345 last week).
European stock markets trade flat today. Main US indices opened on a weak footing with Nasdaq underperforming after Nikkei reported, without citing anyone, that Apple notified suppliers it decided to cut iPhone X’s production target for January-March period to about 20m units due to slower-than-expected sales in year-end holiday shopping season in key markets such as Europe, the US and China.
News Headlines:
US consumer spending rose at a solid pace in December (0.4%) after an upwardly revised advance a month earlier (0.8%) as shoppers splurged during the holiday season. While incomes also rose (0.3%), the saving rate fell to a fresh 12-year low. The Federal Reserve’s preferred inflation gauge — tied to consumption — rose 0.1% in December from the previous month and 1.7% from a year earlier. Excluding food and energy, so-called core prices climbed 0.2%, matching the survey median. The core was up 1.5% from December 2016.
The ECB will only stop pumping cash into the euro zone economy when it is confident that inflation is heading towards its target even without its extra help, the chief economist Praet said. He also added the ECB had not decided yet how to end the asset purchase programme, whether gradually or at once.
 is becoming again a bit more supportive for the USD. Investors might also turn a bit more cautious on USD shorts going into Wednesday's Fed meeting. ){kind=link}