Markets:
Global core bonds traded with a small downward bias today. US Congress’ bipartisan agreement on a 2-yr funding bill which will increase spending by $300 bn and result in higher US budget deficits, still weighed on core bond sentiment in the first hours of trading. The sell-off accelerated around noon via the UK Gilt market after an hawkish inflation report by the Bank of England. Weakness on European stock markets couldn’t turn the tide. ECB/Fed speak and eco data didn’t influence trading neither. ECB governors Praet and Weidmann fulfilled their usual roles as monetary dove and hawk, though the former stressed future changes on interest rate guidance. Dallas Fed Kaplan and Philly Fed Harker aligned with the 2018 Fed scenario of 3 rate hikes. Weekly US jobless claims continue to hover near historically low levels. The US yield curve bear steepens with yields 0.2 bps (2-yr) to 3.8 bps (30-yr) higher. Changes on the German yield curve range between +0.7 bps (2-yr) and +3.4 bps (30-yr). 10-yr yield spread changes versus Germany are narrowly mixed with Greece underperforming (+6 bps). Greece returned to the bond market with a new syndicated 7-yr deal (€3 bn Feb2025). The bond was priced to yield 3.5%, at the tight end of 3.5%-3.625% guidance. The order book exceeded €6.8 bn. The Greek government aims to create a cash buffer of about €20 bn by the time its bailout program ends in August, of which half will come from markets.
Rising US yields and the prospect of higher US budget deficits propelled the dollar yesterday. The greenback remained well bid in Asia and in Europe this morning. USD/JPY was supported by a constructive equity sentiment. EUR/USD saw some follow-trough selling after yesterday’s break below 1.2323 support. EUR/GBP selling after the BoE’s policy statement pushed EUR/USD to an intraday low in the 1.2215 area. From there, the euro decline/USD rally stalled. EUR/USD returned to 1.2250/75 area. Core yields remain upwardly oriented, but for new it is no additional help for the dollar. US jobless claims dropped to a very low 221 000, but didn’t help the dollar. This evening’s 30-year US bond auction might be a next point of reference for interest markets and for the dollar.
Focus for sterling trading was on the policy statement and inflation report of the Bank of England (BoE). The BoE as expected left is policy rate unchanged at 0.5%. The BoE was more optimistic on growth/demand compared to its November inflation report. A further reduction in the available spare capacity in the economy will keep inflation above target over the policy horizon. This indicates that a faster pace of rate hikes might be needed than anticipated until now. Market expectations for a May UK rate hike have risen to about 65% after the BoE policy statement (from about 50% before). The prospect of additional interest rate support propelled sterling. EUR/GBP dropped from the 0.88+ area and filled bids in the 0.8735 area. However, the 0.8690 range bottom stayed out of reach for now. Cable rebounded back above the 1.40 barrier.
News Headlines:
The Bank of England said that earlier and larger interest rises are likely to damp the effects of a stronger global economy on UK inflation. In a hawkish quarterly inflation report, all of the BoE’s MPC agreed that the central bank was no longer willing to tolerate inflation above its 2% target for the next three years.
Germany’s trade surplus fell last year for the first time since 2009, in a further sign that vibrant domestic demand is sucking in more imports and slowly re-balancing the country’s export-oriented economy.
