Markets:
Global core bonds traded mixed today with German Bunds underperforming US Treasuries. The final German coalition agreement and upward revisions to EMU growth forecasts by the EC might be at play. Trading ranges in both contracts narrowed again following two volatile days. European stock markets and Brent crude recover some of this week’s losses. NY Fed Dudley said that the stock market swoon won’t alter the FOMC’s thinking at the moment. At the time of writing, German yields add 0.6 bps (2-yr) to 2.8 bps (10-yr). Daily US yield changes range between -0.4 bps (2-yr) and -2.1 bps (10-yr). 10-yr yield spreads versus Germany narrow 2 bps with the periphery outperforming (up to -9 bps).
There was again no unequivocal theme to guide USD trading today. There were no market-relevant data in EMU or in the US. Risk sentiment was mixed; European equities rebounded, but US equity futures indicated modest losses. USD/JPY traded with a slightly negative bias holding in the low 109 area during most of the European session. At the same time, the dollar gained slightly ground against the euro with EUR/USD drifting lower in the 1.23 big figure. If anything, interest rate differentials between the US and Germany narrowed slightly, but this was of little significance for EUR/USD trading. The pair returned to the previous 1.2335/23 support, but for now there is still no break yet. Currency investors are still looking for a trigger/new market theme after this week’s repositioning on the equity and interest rate markets EUR/USD trades in the 1.2335 area. USD/JPY is currently changing hands around 109.20. The trade-weighted dollar (DXY 89.85) is holding a cautious upward bias.
Sterling was captured in technical trading today. There were no important UK eco data. In its winter forecasts, the European Commission expects UK growth of 1.4% in 2018 and 1.1% in 2019, lagging well behind EMU growth. However, this assessment was no surprise. EUR/GBP drifted temporary higher in the 0.88 big figure, but a sustained break again didn’t occur. The pair trades little changed at around 0.8870. Investors await tomorrow’s BoE policy decision and the Bank’s quarterly inflation report. Markets will look for clues whether Carney and Co are inclined to give more weight to containing inflation rather than to support growth further out in 2018. Cable (1.39 area) declined off the 1.40 barrier, but this move was mainly driven by relative USD strength.
News Headlines:
The EMU economy will expand faster than previously anticipated in 2018 and 2019, the European Commission said in its winter forecast. It sees growth of 2.3% in 2018 (up from 2.1%). The 2019 growth forecast was upwardly revised to 2% percent. Inflation is expected to remain subdued at 1.5% in 2018 and 1.6% in 2019.
German Chancellor Merkel’s CDU/CSU and the Social Democrats (SPD) agreed to a coalition deal. According to media reports, Merkel’s CDU will get five ministries, including defense and economy. CSU will take three. SPD leader Schulz is said to serve as foreign minister. Hamburg Mayor Scholz will oversee finance, replacing Wolfgang Schaeuble.
Oil prices are little changed today as the boost from a report showing a drop in US crude inventories last week is offset by evidence of growing US output. Brent crude hovers just below $67/b, off the $71/p top late January.
The National Bank of Poland (NBP) left its policy rate unchanged at a record low of 1.5%. Investors are looking out for a press briefing after this report was finished to see whether the NBP intends to change tactics this year or not.
