Trading on US and European bond markets was again confined to tight ranges. Investor sentiment in Europe turned more cautious despite yesterday’s rally on WS. A sharp decline of USD/JPY and a mediocre performance of European equities provided a cautious bid for core bonds, but the intraday gains remained modest. At the start of the US trading, the US NFIB small business confidence printed stronger than expected. Fed’s Mester said that recent market turmoil doesn’t change her assessment on the economy. At the time of writing, US/core yields are mostly slightly lower. The picture on the equity markets remains indecisive. US yields decline up to 1.5 bp with the 2-year underperforming (+2 bp, Mester comments?). German yields decline up to 1.5 bp, with the 10-year outperforming. 10-y yield spreads versus Germany widened across the board. Italy and Spain added 4bp. Portugal widened 6bp. Greece again underperformed (+11bp).

Dollar weakness prevailed today. We didn’t see any specific economic news to explain the move. The sharp decline of USD/JPY in Asia this morning and early in Europe also weighed on other USD cross rates. USD/JPY dropped from the 108.75 area to fill bids below 107.50 just before noon in Europe. The move created uncertainty on European equity markets. The risk-off this time didn’t help the dollar against the likes of the euro. The USD/JPY decline also propelled EUR/USD back to the 1.2350 area. The EUR/USD rally slowed temporary early in US dealings after a strong NFIB confidence and ‘hawkish’ comments from Fed’s Mester (no impact yet from recent market turmoil). Still, the dollar is holding within reach of the intraday lows. EUR/USD trades at 1.2350. USD/JPY trades near 107.70.

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The UK January price data were slightly stronger than expected. Headline CPI stabilized at 3.0% (a decline to 2.9% was expected). Core CPI unexpectedly rose to 2.7% Y/Y from 2.5%. PPI prices were mixed, but especially input PPI was also higher than expected. The report was in line with the assessment from last week’s BoE inflation report. The BoE indicated that the balance of policy risks tilted to more vigilance on inflation rather than on stimulating growth. The BoE also said that at least three rate hikes might be needed to bring inflation to target. Sterling gained a few ticks (against the euro) after the inflation data, but the gain was limited an short-lived. Investors apparently want clarity on Brexit first before engaging in sterling long positions. Euro strength also blocked the downside in EUR/GBP. EUR.USD trades again just below 0.89.

European equities failed to extended yesterday’s rebound. Most indices are losing between 0.25% and 0.5%, with Spain and Italy underperforming (-1.0%). Major US indices started the session with losses of about 0.5%.

News Headlines

British inflation unexpectedly stabilized at 3.0%, close to its highest level in nearly six years. The market consensus expected a modest decline to 2.9%. Core inflation even rose to 2.7% from 2.5%. PPI data series were mixed, mostly also slightly higher than expected. The data confirm the assessment of the BoE at last week’s inflation rapport that the policy rate might need to be raise at a slightly faster pace than anticipated until recently in order to bring inflation back to the 2% target.

Optimism among US small companies rose more than expected in January as a record number of owners said now was a good time to expand their activity, according to a National Federation of Independent Business survey. The NFIB headline small business optimism index rose from 104.9 to 106.9. Only a rise to 105.3 was expected.

Federal Reserve Member Loretta Mester said that recent stock market turmoil hasn’t changed her view on the economic outlook. "While a deeper and more persistent drop in equity markets could dash confidence and lead to a pullback in risk-taking and spending, the movements we have seen are far away from this scenario," Mester said

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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.


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