Markets
Global core bonds traded with a small downward bias in the first half of European dealings despite mixed EMU eco data. EC confidence remains very strong. Spanish inflation rose faster than expected, but German CPI disappointed. Volatility on markets increased after the release Fed chairman’s Powell first address to US Congress. The written statement suggest that he is bullish on the economy. Inflation is expected to move up this year and stabilize around the Fed’s 2% target. Last month’s spike in volatility won’t derail the Fed from further gradually increasing its policy rate. Overall, the written statement resembled the statement from after the January policy meeting and the Minutes. The declaration offered no insight on a possibly increasing the neutral rate or on the exact amount of hikes to be expected this year. A spike lower in US Treasuries was rapidly undone because of simultaneously published weaker-than-forecast US eco data. US durable goods orders fell by the most in 6 months (-3.7% Y/Y). Orders for non-defense capital goods excl. aircraft, a proxy for business investment fell by 0.2% Y/Y instead of a 0.5% Y/Y increase. The US trade deficit widened more than forecast to the largest since 2008. This indicator is reappearing on investors’ radar as the US’s twin deficit problem gains more traction. The data currently have the upper hand on markets, but Powell’s actual testimony still needs to start. US yields trade up to 1.4 bps (30-yr) lower at the time of writing. The German curve is up to 0.7 bps higher. 10-yr yield spreads vs Germany narrow up to 2 bps.
The dollar traded indecisive this morning as investors looked forward to the speech of Fed Powell before the House’s financial committee. EUR/USD hovered in the 1.2320/40 area. USD/JPY held close to the 107 big figure. German regional inflation data came in on the softer side of expectations. Initially the data had little impact on markets. However, European yields and the euro declined slightly as the global figure was reported at 1.2% Y/Y this afternoon (1.3% expected). The written statement of Powell’s testimony was published at 14.30 CET. The Fed Chairman expects ongoing solid growth and indicated to continue Yellen’s approach of gradual further rate hikes. He also said that recent volatility was no reason for the Fed to change tactics. The text was in line with the Minutes of the January Fed meeting. US yields rose marginally upon the release of the text, but the rise is already undone. EUR/USD tries to decline below the 1.23 handle despite poor US eco data (cf supra). USD/JPY is still going nowhere in the 107 area. Will the Q&A session finally be able to trigger some more pronounced directional moves?
There were no data in the UK today, but there was still plenty of Brexit noise as the political debate continues. UK PM May will present the ‘official UK Brexit approach’ on Friday. However, recent steps/signs from the UK government and from the opposition (Labour party leader Corbyn favouring a customs union) didn’t unlock the UK political stalemate. At the same time, Scotland, Wales & Northern Ireland still question the division of power between London and the local authorities post-Brexit. Earlier this week, investors saw tentative signs of a potential shift to a softer Brexit. However, for now, this proves to be unjustified. Sterling ceded again slightly ground. EUR/GBP trades in the 0.8840 area. cable hovers in the 1.3950 area.
News Headlines:
The ECB could end bond purchases this year while an interest rate hike in 2019 is not unrealistic if the euro zone’s economic upswing continues, Bundesbank President Weidmann said.
Hungary’s central bank left its main interest rates unchanged at record lows, as expected, holding onto its set of unconventional tools aimed at curbing long-term interest rates.
