Markets:
Global core bonds trade with an upward intraday bias, but gains remain limited. The Bund opened significantly below yesterday’s official close in a catch-up move with the US Treauries’ sell-off after hawkish FOMC Minutes. The Bund caught more intraday momentum when stocks dived lower on a bigger-than-expected setback in the German Ifo-indicator. It’s the third such negative surprise this week after German ZEW and German/EMU PMI. All three indicators remain near historically high levels though. US weekly jobless continue to hover near multi-decade lows, confirming strength on the US labour market. Minutes of the previous ECB meeting showed that "Some members expressed a preference for dropping the easing bias regarding the APP programme from the governing council’s communication as a tangible reflection of reinforced confidence in a sustained adjustment in the path of inflation". Markets didn’t react, but it highlights the possibility of changes to the ECB’s communication at the March meeting. Changes on the German yield curve range between -1.2 bps and 1.5 bps across the curve. US yields decline by 0.8 bps (2-yr) to 3.5 bps (10-yr). Peripheral bonds underperformed today, with Portuguese and Italian spreads adding 5 bps.
US yields and the dollar rose yesterday evening as the Minutes of the January Fed meeting reinforced market expectations that the Fed will continue policy normalization this year. However, both moves stalled today. The Ifo Business Climate indicator declined more than expected in February, in line with yesterday’s EMU PMI’s, but the report still indicates strong growth at the start of 2018. German yields declined after the release, but so did US ones. In the end, interest rate differentials were little changed. The reaction of the euro was negligible. With little other high profile news on the agenda, this week’s USD rebound did ran into resistance. US jobless claims printed at 222 000, near the cycle low, but it didn’t help the dollar. EUR/USD trades in the 1.2330 area. USD/JPY dropped back below the 107 handle (currently 106.80). This evening, FX traders will also keep an eye at the US 7-yr Treasury auction. However, after yesterday’s decent outcome of the sale of 5-yr bonds, the risk of a sharp rise in US yields has probably eased. For the dollar, some more consolidation might be on the cards short-term.
Sterling traded with a tentative negative bias against the euro today. UK Q4 growth was downwardly revised to 0.4% Q/Q from and initial estimate of 0.5. Q4 2017 data are a bit old news for markets. The reaction of sterling was limited. The report raises questions whether the BoE should consider raising rates in the near future as BoE’s Carney suggested of late. EUR/GBP gained a few ticks in the 0.88 big figure this morning, but the pair trades currently again in the 0.8840/50 area. In a broader perspective, sterling is still going nowhere as markets await more clarity on the Brexit approach of the UK government. Cable hovers in the 1.3940 area as the recent USD rally slows.
News Headlines:
German IFO business confidence declined more than expected in February from 117.6 to 115.4, the lowest level in 5 months. Still, the index stays at a high level, suggesting that Europe’s biggest economy is set for solid growth despite a stronger euro clouding the outlook of exporters.
UK growth slowed more than expected at the end of last year. UK GDP rose only 0.4% Q/Q in Q4. Business investment and the contribution of net foreign trade to growth disappointed. The downward revision of Q4 growth (from 0.5%) also reduced the UK growth performance for the whole of 2017 to 1.7%, the slowest pace since 2012.
Canadian retail sales unexpectedly declined 0.8% M/M in December after climbing for the past three months as a pullback at electronics and appliance stores offset higher purchases of new cars. The consensus estimate forecasted a rise of 0.2%. The Canadian dollar weakened after the publication of the release. USD/CAD rebound north of 1.27.
