HomeContributorsFundamental AnalysisSunset Market Commentary

Sunset Market Commentary

Markets

Global core bonds gained some ground today with German Bunds outperforming US Treasuries. A bigger-than-forecast setback from (record) EMU PMI’s initiated Bund gains. US Treasury investors weren’t inclined to blindly follow the Bund’s move higher with tonight’s supply operation and FOMC Minutes in mind. Both have the potential to weigh on US Treasuries: supply via lower demand against the background of rising yields and the projected surge in the US’s twin deficit and FOMC Minutes via a hawkish tone suggesting a continuation of monetary policy normalization. Philly Fed Harker, who doesn’t vote on policy this year, confirmed his more dovish views of only two additional hikes this year. German yields decline by 1 bp (5-yr) to 2.8 bps (30-yr). Changes on the US yield curve are limited to -1 bp. Spreads vs Germany are unchanged apart from Greece (+10 bps) and Portugal (-4 bps)

The dollar gained gradually further ground today, but the pace of the rise remained very modest. Flash EMU February PMI’s slowed more than expected. The report caused an outperformance of Bunds over Treasuries, further widening the interest rate differential. However, the direct impact on the euro was very modest. EUR/USD drifted further south in the lower half of the 1.23 big figure. However, looking at other USD cross rates, we assume that the price action was still mainly a continuation of the USD uptrend rather than anything else. EUR/USD trades currently in the 1.2320 area. The first important support area (1.2206/1.2165) is still quite far away. USD/JPY underperforms the overall USD performance. The pair hovers in the 107.40/50 area. USD traders are now looking forward to the auction of 5-yr Treasuries and the Minutes of the January Fed meeting scheduled this evening after the close of the European markets. We expect to Fed maintain a hawkish tone.

Sterling reversed part of yesterday’s rebound. Part of the move occurred after softer than expected UK labour market data. The UK economy added less jobs than expected in the three months to December and the unemployment rate unexpectedly rose to 4.4%. Wage growth (2.5% Y/Y) was in line with consensus. The data played a role, but Brexit also remained at work. The letter of 62 Brexit-hardliners of the Conservative Party to UK PM May urging the government to go for clean break from the EU indicates the difficult position of the UK PM and prevents a further GBP-rebound. EUR/GBP trades in the 0.8840 area. Cable hovers in the mid 1.39 area.

News Headlines

The IHS Markit EMU composite PMI declined from 59.6 in January to 57.5 this month. The market consensus expected a more modest decline to 57.5. Both the measure for the manufacturing sector (57.5 from 58.8) and for the services sector (56.7 from 58.0) declined more than expected. The indicator suggests that the EMU growth momentum eased at the start of 2018, but it remains at a healthy level.

Britain’s unemployment rate rose to 4.4% from 4.3% in the three months to December. It was the first rise in almost two years. Employment growth also printed at a softer than expected 88 000 in the three months to December (165 000 was expected). Average hourly earnings were close to expectations at 2.5% Y/Y.

ECB member Vitas Vasiliauskas in a Reuters interview said that he has not seen "any unwarranted tightening" of financial conditions. He added that an appreciating currency is a normal reaction to an improving economic outlook.

The Swedish government expects this year’s budget surplus at 1.1 % of GDP, compared with a 0.9 % surplus in December. The upward revision was primarily due to reduced government expenditure, but also because tax revenues are seen growing faster, the government said.

KBC Bank
KBC Bankhttps://www.kbc.be/dealingroom
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

Featured Analysis

Learn Forex Trading