Markets
Core yields remained on an upward trajectory today. The ECB yesterday indicated that the economy is strong. This might lead the bank to reduce policy stimulation in a not that distant future. The global positive economic momentum and a favourable risk sentiment continue to block any meaningful rebound of US and European bonds. At the same time, technical factors stay also in play. There is probably a ‘real trigger’ needed for yields to break beyond key levels (10-y US 2.65%/10-y Germany 0.62%). This news didn’t come today . President Trump’s speech was neutral for markets. US data (Q4 GDP, orders data) were OK, but they also didn’t provide the trigger to force an outright break. US yields rose between 1.5 bp (30-y) and 3.5bp (5-year), the belly of the curve underperforming. The US 2-year yield surpassed the 2.10% barrier. The German yield curve showed a similar picture. 5-year rose 2.8bp. The longer end outperformed with the 30-y declining 2.2 bp.
The dollar entered calmer waters this morning after wild intraday swings yesterday during the ECB press conference and on comments of US president Trump. Trump subscribing the US strong dollar policy eased the USD sell-off as markets looked for guidance from key US eco data and another address of president Trump at the WEF in Davos this afternoon. Contrary to yesterday, the news from Davos and the US data were not able to provide clear guidance for (FX) trading. President Trump gave a ‘generalist’ speech on his ‘America first’ approach, but didn’t address specific issues on international trade or the dollar. The US data were OK. US Q4 for growth printed at 2.6% Q/Qa (vs 3.0% expected). Consumption and investment were strong. Foreign trade and inventories weighed on growth. The market reaction to the data was limited/mixed. EUR/USD trades around 1.2440. USD/JPY struggles to hold north off 109. So, the dollar decline has halted, but the jury is still out whether this is the start of a sustained bottoming out process. USD/JPY looks more fragile than USD/EUR.
EUR/GBP started European trading in the 0.8750 area after a rebound off the 0.8690 support yesterday. The UK Q4 growth printed at 0.5% Q/Q versus expectations of only 0.4%, but ONS said that growth was uneven. BoE governor Carney indicated that the UK economy could stop lagging behind global growth later this year as there is clarity on the relationship with the EU. The positive comments from the BoE and better growth data reinstalled a bid for sterling. EUR/GBP turned (slightly) back south in the 0.87 big figure (currently 0.8735/40). Cable rebounded above 1.42. However, for now a retest of yesterday’s sterling peaks against the euro and the dollar hasn’t occurred yet.
News Headlines
UK growth picked up in the fourth quarter of last year, rising by 0.5 % Q/Q. Consensus expected only 0.4% growth. However, the ONS said the big picture remained one of a slower and more uneven expansion. In 2017 as a whole, growth was 1.8% compared with 1.9% in 2016.
ECB’s Benoit Coeure said at the WEF in Davos that "The last thing the world needs today is a currency war…we live in a world where exchange rates are not and should not be targeted for competitive purposes."
Germany’s main rival parties will aim to wrap up coalition talks for new government Feb. 4, without setting a fixed deadline, a spokesman for Germany’s Social Democrats says.
US eco data were OK but didn’t bring any really big surprise. US Q4 growth printed at 2.6% Q/Qa (vs 3.0% expected). Consumption and investment were strong suggesting a good start of 2018. Net exports and inventories weighed on growth. December durable goods orders grew a strong 2.9% M/M. Shipments of capital goods were also strong suggesting a positive momentum of investment. The goods trade deficit widened to $71.6 bln, the widest since 2008.
