Markets
Yesterday, US Treasuries and German bounds opened in positive territory as angst for a trade war supported a modest a safe haven bid for bonds. However, gains evaporated as fears for on an escalation of the trade frictions eased after the White House signaled that import tariffs on steel and aluminum could be selective. In a daily perspective, changes in Treasury yields were less than 1 bp. This was also the case for German yields except for the 30-y (-3.4bp). Despite a cautious risk-off , 10-y intra-EMU spreads versus Germany mostly narrowed, Greece (-6bp) and Portugal (-4bp) outperforming; Ireland underperforming (0 bp). Today, the focus will be on the ECB policy decision and on US trade policy. The ECB will probably hold a cautious bias regarding policy normalization. The growth forecast will remain optimistic, but recent evidence doesn’t provide a reason for an upward revision to the inflation forecast. Draghi might bring some minor changes in its communication, but probably stay vague on finishing the APP. Of late, Bunds outperformed Treasuries. The market probably already discounts a cautious ECB. In this context, any upticks in Bunds/decline in EMU yields might be modest. The rise in US yields eased recently, but bond gains were modest given the intense trade tensions. Will US yields resume the uptrend once the trade issue moves to the background? The Fed at least didn’t give hints that recent developments will slow policy normalization.
Yesterday, EUR/USD and USD/JPY held tight ranges even as trade tensions intensified after Gary Cohn resigned as economic advisor of president Trump. The ADP labor market report showed job growth of 235 000 in the US private sector in February, but the dollar didn’t profit. Both EUR/USD (1.2411) and USD/JPY (106.07) closed the session little changed. The trade debate and the ECB communication on monetary policy will probably also be the drivers for trading in the major FX cross rates today. We expect the ECB to hold a relatively soft tone on policy normalization, but we doubt that will be the trigger for a sustained euro decline. Easing trade tensions might gradually put a floor for the dollar. A combination of a more positive global context and strong US payrolls tomorrow (including wages) might create a more positive environment for the dollar.
Yesterday, sterling initially traded with a slight negative bias. The EU draft negotiation paper showed that the block isn’t prepared the meet UK calls for a deep cooperation and free access to the EU market (including for financial services). EUR/GBP jumped temporary north of 0.8950. However, as was often the case of late, the Brexit noise again didn’t change the broader picture in the EUR/GBP cross rate. The pair trades again in the 0.8925 area. This morning, the RICS house price balance was soft (0% vs 7% expected). There are no important UK eco data today. More technical trading in EUR/GBP might be in the cards.
News Headlines
US equities ended the session mixed/little changed. Indices reversed most of the initial losses as the White House indicated that countries including Canada and Mexico could be exempted from the steep tariffs on steel and aluminum. The easing of trade tensions also caused a relief rally on Asian markets this morning.
China February exports rose 44.5% Y/Y. Imports grew 6.3 percent. The data might be distorted by the timing of the Lunar New Year. Even so, combined data for January and February also showed a sharp rise in export growth. The widening in the trade surplus comes at a time when trade frictions between the US and China are mounting.
Japan’s Q4 2017 GDP growth was upwardly revised to an annualised 1.6%, previously reported at 0.5% Q/Qa. Higher capital expenditure and a bigger contribution of inventories were the main drivers behind the revision.
Today, the eco calendar only contains second tier data in EMU. The US Jobless claims are expected to remain at a very low level (220 k). The ECB holds a regular policy meeting and president Daghi will give a press conference. Ireland will sell bonds.
