Sunset Market Commentary

Markets

Global core bond trading was confined to narrow sideways ranges ahead of the US payrolls amid an empty EMU eco calendar. The core bond sell-off continued after a strong US payrolls report with strong wage growth popping out. It adds to recent confidence that inflation will be upwardly bound during 2018. Market-based inflation expectations reached multi-year highs while the Fed (but also the ECB) embraced positive growth and inflation dynamics in their recent policy statements. Ultra-dovish Fed member Kashkari (who voted against last year’s rate hike) admitted after the labour market report that if wage growth continues, it may effect Fed hikes this year. The US yield curve bear steepens at the time of writing with yields 0.9 bps (2-yr) to 3.8 bps (10-yr) higher. The German yield curve shifts in similar fashion with yields 0.1 bp (2-yr) to 3 bps (10-yr) higher. 10-yr yield spread changes versus Germany range between -1 bp and +2 bps with Greece outperforming (-7 bps).

The dollar continued trading weak in the run-up to the US payrolls, but the trade-weighted dollar didn’t set a new cycle low anymore. EUR/USD hovered around the 1.25 pivot. The yen lost its safe haven appeal and didn’t profit from the correction of European equities. The BOJ’s commitment to keep an easy policy and the rise in core (US and EMU) yields are preventing a yen rebound. US payrolls were strong (200k net job growth) and wage growth accelerated substantially to 2.9% Y/Y (vs 2.6% expected). The report triggered a further rise in US yields. USD/JPY spiked north of 110. The dollar gained modest ground against the euro. EUR/USD trades in the 1.2450 area. The move remains unconvincing from an USD point of view. Topside resistance (1.2537/98) stays within reach.

Sterling underperformed the euro and the dollar today. EUR/GBP trading is still confined to tight ranges, but the 0.8690 range bottom looked solid of late. The pair did build on yesterday’s rebound from the start of European trading. The UK construction PMI was substantially weaker than expected at 50.2 (52.0) expected. The release was in line with the intraday momentum, but there was no acceleration of GBP losses after the release. Comments from UK trade Secretary Fox that the UK must not enter a new customs union didn’t help sterling. The pick-up in global volatility was a tentative negative for sterling, too. Sterling lost further ground after the US payrolls release. Cable is losing more than a full big figure (at 1.4150). EUR/GBP is again nearing the 0.88 area.

European equity indices are losing about 1.0% as the rise in core yields and the strong euro are weighing. US equity markets are also under pressure, opening with losses of 0.5% to 1.0%. The Dow underperforms.

News Headlines

The US labour market remained in very good shape in January. The US economy added an additional 200 000 jobs, beating the consensus by 20 000. The unemployment rate was stable at 4.1%, the lowest level since 2000. Wage growth also beat expectations rising 0.3% M/M and 2.9% Y/Y. The Y/Y AHE growth was the highest since 2009.

The UK must not enter into a new customs union with the EU after it leaves the bloc, Trade Secretary Liam Fox said, setting a new red line for Theresa May’s negotiations with Brussels and her own party on Brexit.

Growth in Britain’s construction sector came almost to halt in January. The construction PMI fell to 50.2 in January from 52. The consensus estimate was 52.0. Uncertainty on Brexit caused new orders to dry up according the survey.

ECB’s Coeure urged European governments to push ahead with plans to strengthen the monetary union to avoid stretching his institution’s mandate in the next crisis. "To assume that the current economic expansion will heal all wounds is naive. The euro area needs reform." he said in a speech in Slovenia.