Markets:
Yesterday evening’s Fed meeting had no lasting impact on today’s trading session. The Fed kept its policy rates unchanged while upgrading its economic and inflation assessment and strengthening the tightening bias in its forward guidance. Core bond sentiment remained bearish with modest losses during European dealings. The Bund and US Note future bottomed when stock market sentiment soured. The German Dax lost short-term support and currently records a 1.5% loss. Second tier eco data and dovish comments by Praet were ignored. The German yield curve steepens on a daily basis with yield changes varying between -1.3 bps (2-yr) and +1.2 bps (30-yr). US yield increases range between +0.4 bps (2-yr) and +1.9 bps (10-yr). 10-yr yield spread changes versus Germany are narrowly mixed with the periphery outperforming (-2 bps to -4 bps).
The dollar also couldn’t find a clear trend despite yesterday’s ‘positive’ guidance from the Fed’s policy statement. EUR/USD again revisited a short-term intermediate support just below 1.24, but the test was rejected, triggering a new intraday euro upleg. The further rise in core yields early this morning initially supported USD/JPY. However, this move slowed as bond yields eased later due to profit taking on European equity markets. Eco data were second tier. US jobless claims remain low, indicating an ongoing positive momentum on the US labour market. However, the report was ignored. Investors are looking forward to tomorrow’s US payrolls, with the focus on wage growth. USD/JPY is changing hands in the mid 109 area, off the intraday top around 109.75. EUR/USD (1.2440) is holding relatively strong, but the short-term consolidation range (1.2337/1.2598 ) remains in place.
Sterling held a positive momentum this morning despite several negative headlines on the EU-UK Brexit talks and on political tensions within the UK government because of PM’s May’s Brexit approach. EUR/GBP drifted further south in the 0.87 big figure. Mid-morning, the UK manufacturing PMI declined more than expected from 56.2 to 55.3 (56.5 was expected). This is still a decent level, but the decline indicates that the UK production sector will contribute less to overall growth than what was hoped for. Especially domestic demand disappointed. The report also suggests that there is no need for the BoE to rush to further rate hikes short term, downplaying recent comments from BoE’s Carney earlier this week. EUR/GBP rebounded and currently trades in the 0.8760 area. Overall euro strength supported the rebound. Cable (1.4200 area) trades off the intraday highs, but losses are limited as the dollar continues trading soft across the board.
News Headlines:
The Czech National Bank as expected increased its policy rate by 25 bps from 0.50% to 0.75%. The central bank raised its 2018 GDP growth forecast from 3.4% to 3.6% and expects 3.2% growth in 2019. The Q1 2019 inflation forecast was lowered from 2% to 1.9%. The CNB forecasts an average koruna rate of EUR/CZK 24.9 in 2018 and EUR/CZK 24.5 in 2019. The forecasts imply one more rate hike in 2018. Our in-house expectations is two additional hikes this year.
The final January EMU manufacturing PMI was confirmed at 59.6. The UK manufacturing PMI disappointed and slipped to 55.3 from 56.2 (vs 56.5 expected). New orders fell to 56 from 56.9, but that remains a decent level. The US manufacturing ISM stabilized near December levels (59.1 from 59.3) while consensus expected a bigger setback. The prices paid component surged to an incredible 72.7. New orders declined to 65.4, which remains very high.
Inflation in the euro zone is still weak so the ECB needs to keep in place its stimulus measures, ECB Chief Economist Praet said, repeating the bank’s long-standing guidance
