Markets:
Global core bonds profited from safe haven flows during European trading as losses on stock markets amounted to 1.5%. Today’s expected announcement of tariffs on steel and aluminum by US President Trump probably played a role. The German Bund briefly crossed 159.75 with the German 10-yr yield testing 0.62%. A break didn’t occur, triggering return action. The intraday topping off pattern in core bonds was further enhanced by stronger than expected US eco data. PCE deflators printed in line with forecasts, but at high levels. Jobless claims dropped to historically low levels, confirming tight conditions on the US labour market. Markets are now counting down to round 2 of Fed chair Powell’s testimony for US Congress. At the time of writing, changes on the US yield curve range between -1.2 bps (5-yr) and +0.7 bps (30-yr). German yields shift around 1.5 bps lower across the curve. 10-yr yield spread changes versus Germany are almost unchanged with Greece underperforming (+10 bps).
The dollar succeeded some incremental further gains today; a cautious continuation of the post-Powell rebound. The Fed-president indicating that US rates could be raised four times this year reinstalled some kind of renewed ‘divergence trade’. EMU data were OK, but in line. US jobless claims dropped to a multi-decade low. The PCE deflator printed as expected at 0.4% M/M and 1.7% Y/Y. US yields tried to reverse a cautious intraday decline after the release of the data, but it didn’t help any further USD gains, at least not of the dollar against the euro. Even so, the 2-yr interest rate differential between the US and Germany reached a new cycle top of 280 bps, the highest level since 1997! Interest rate differentials are not the only factor guiding currencies, but at some point this kind of premium should finally give the dollar downside protection. EUR/USD already tested the key 1.2165 area earlier today. A real break didn’t occur yet, but the pressure is building. USD/JPY tries to regain the 107 barrier, but it remains an uphill battle. The focus now turns to the manufacturing ISM and even more to the Q&A of Powell’s hearing before the US Senate.
Sterling showed no clear directional trading pattern (against the euro). Brexit tensions are dominating the headlines. Yesterday, EU negotiator Barnier warned that there was no guaranty on a transition deal. He also made a proposal on the Irish boarder that was inacceptable for the UK. Today, EU president Tusk said that one can’t expect frictionless trade outside the bloc’s single market. The political bickering continues, one day before the key Brexit speech of UK PM May. Sterling didn’t decline further against the euro. EUR/GBP hovered in the 0.8840/75 area. The UK manufacturing PMI was little changed at 55.2. This remains quite a healthy level. However, it didn’t change the markets’ assessment on the BoE’s rate intentions. The report had little impact on sterling trading on EUR/GBP.
News Headlines:
US consumer prices increased in January, with PCE core inflation (0.3% M/M & 1.5% Y/Y) posting its largest gain in 12 months, bolstering views that price pressures will accelerate this year. The PCE deflator was in line with expectations (0.4% M/M 1.7% Y/Y). January personal income (tax bump?) and spending rose by 0.4% M/M and 0.2% M/M respectively while weekly jobless claims dropped to the lowest level since 1969 (210k)! The February manufacturing ISM rose from 59.1 to 60.8 (vs 58.7 expected) with the prices paid component surging to 74.2!
The February EMU manufacturing PMI was slightly upwardly revised from 58.5 to 58.6 while the UK manufacturing PMI stabilized around 55.2. The January EMU unemployment rate declined from 8.7% to 8.6%, the lowest level since December 2008.
