Sunset Market Commentary

Markets

Global core bond trading slowed to a trickle today ahead of tonight’s FOMC meeting. Both the Bund and the US Note future eke out some gains with end-of-month extension buying playing a minor role. EMU CPI remains low at 1.3% Y/Y for the headline and 1% Y/Y for the core reading, but didn’t affect intraday trading dynamics. Strong German and US labour market data couldn’t do the trick neither. The US yield curve flattens with yield changes ranging between +0.4 bps (2-yr) and -2.9 bps (30-yr). The German yield curve bull flattens with yields 0.5 bps (2-yr) to 6 bps (30-yr) lower. The significant outperformance of the 30-yr yield is partly technically related following the failed attempt to break above the 2017 top (1.38%). 10-yr yield spread changes versus Germany are barely changed with Greece underperforming (+7 bps). We expect the Fed to leave policy rates unchanged tonight (even though the market implied probability of a hike is 20%), but upgrade its assessment of the economy and inflation thereby paving the way for a March hike. Given market positioning, this could trigger a steepening of the US curve, with room for a short term correction lower in yields at the front end. The US Treasury’s announcement (quarterly refunding) that it will halt attempts to extend the maturity of its debt also argues in favour of some steepening as supply will be more directed to the front-and of the curve.

EUR/USD continued trading with a positive bias today. Dollar caution ahead of the Fed policy decision was probably at play. At the same time, the euro remained will bid even as EMU eco data were mixed, at best. EMU (un)employment data confirmed an ongoing improvement in labour market conditions. On the other hand, German retail sales printed soft and EMU inflation (headline 1.3% in January from 1.4%) drifted further away from the 2% ECB target. On the other side of the Atlantic, ADP private job growth was very strong (234 k). The report was completely ignored in EUR/USD trading. The pair trades currently at 1.2450. USD/JPY gained a few ticks an is nearing the 109 barrier. The focus now turns to the Fed statement. An unchanged decision is expected, but the Fed might upgrade its assessment on growth and inflation. Will the Fed’s assessment by strong enough to put a floor for the dollar?

Sterling opened strong this morning. Political noise from the UK government continued to linger. However, the UK currency was supported by decent data overnight and, more importantly, by modestly hawkish comments from BoE governor Carney. Yesterday, he indicated that the BoE could give some more weight to inflation in its assessment further out this year. EUR/GBP traded in the 0.8760 area at the start of European dealings. However, gradually some sterling selling kicked in. A big EUR/GBP buying order and end-of month position adjustments were rumoured to be behind the move. Euro strength was a secondary factor, too. EUR/GBP trades in the 0.88 area. USD weakness kept cable in the 1.4150/1.42 area.

News Headlines

EMU Inflation slowed at the start of the year, highlighting the hurdles faced by the ECB as it attempts to foster price growth in a region still beleaguered in places by high unemployment. CPI rose 1.3% Y/Y in January, above 1.2% Y/Y consensus, but down from 1.4% Y/Y. Core CPI picked up from 0.9% Y/Y to 1% Y/Y. The EMU unemployment rate stabilized at 8.7%, matching the lowest level since January 2009. German unemployment extended its decline as companies stepped up hiring to meet buoyant demand. The German jobless rate dropped to a record low of 5.4% in January. The number of people out of work plunged by 25,000 to 2.415 mn (vs -17,000 forecast).

Hiring in the US private sector continued to outperform expectations in January, underscoring the strength of the labour market. Non-farm private sector employers added 234,000 jobs this month, according to a report from payroll processor ADP. The figure easily topped expectations for 185,000 jobs and marks the fourth straight month of 200k+ gains. The Chicago PMI declined from 67.8 to 65.7, beating consensus (64) and remaining near the highs