Markets:
Global core bonds traded marginally higher in this week’s opening trading session. Volumes were low amid an empty eco calendar. Dovish comments by ECB Coeuré and ECB Smets contributed to an outperformance of the German Bund. Both indicated that inflation is not yet where the ECB wants. Smets even added that it may take longer to reach the inflation goal. The comments come after last week’s dovish interpreted ECB meeting and ahead of speeches by Draghi, Praet, Constancio and others on Wednesday. Tonight’s start of the US Treasury’s mid-month refinancing operation probably also explains the US note future’s lagging behind. German yields decline by 1.7 bps (30-yr) to 2.2 bps (5-yr) at the time of writing. The US yield curve flattens with yield changes ranging between +0.4 bps (2-yr) and -1.6 bps (30-yr). 10-yr yield spread changes versus Germany are broadly unchanged. Resigning centre-left (PD) party governor Renzi ruled out supporting M5S in government. He backed his call to remain in opposition. For now, the Italian political deadlock remains complete, without impacting BTP’s. Tomorrow’s auction could be a good test for investor demand.
Risk sentiment remained constructive in the wake of Friday’s almost perfect payrolls. However, the dollar still didn’t find a clear directional trading pattern. A political scandal in Japan initially weighted on USD/JPY. The dollar was also slightly under pressure against the euro at start of European trading. The pair filled offers in the 1.2340 area. However, the EUR/USD rebound didn’t run into resistance soon. We didn’t see a specific driver, not from the USD side nor from the dollar side of the story. Interest rate differential widened marginally in favour of the dollar, but we doubt that this was an important factor. The topside in EUR/USD is apparently rather well protected as the market, after last week’s ECB meeting, assumes that any ECB normalization will develop in a very gradual way. This was confirmed by soft comments from ECB Smets today. Smets also indicated that FX/the euro remains on the radar of the ECB. At the same time, Friday’s payrolls report might be rather neutral for the Fed (and for the dollar). EUR/USD hovers in the 1.23 area. USD/JPY is holding in the mid 106 area. Tomorrow’s US CPI report is probably the next milestone for USD trading.
Sterling’s trading dynamics was quite similar to Friday. There were no negative headlines on Brexit anymore after last week’s ‘bickering’ between the UK and the EU on their future relationship. With few UK eco data on agenda this week, GBP-traders, amongst others, might give some more attention to the UK spring budget statement which UK Fin Min Hammond will present tomorrow. The picture on the ST UK fiscal performance might not be too bad, potentially supporting a further ST technical rebound of sterling. UK junior Brexit Minister Walker also indicated that a deal on the Brexit implementation period might be close. Whatever the reason, EUR/GBP drifted further south in the 0.88 big figure today (currently 0.8865 area). Cable also rebounded close to the 1.39 big figure.
US equities extended Friday’s post-payrolls rebound, opening with gains between 0.3% and 0.5%. European equities gain modest ground after a strong performance of WS on Friday and of Asian equity markets this morning.
News Headlines:
EMU inflation may need more time to rise than anticipated as spare capacity is taking longer to exhaust but the ECB should not accept price growth below its target, Belgian ECB member Jan Smets said in Reuters interview. The ECB has not even started the discussion about revising its monetary policy framework or even its so-called forward guidance, as the current setup serves the currency bloc well according to Jan Smets.
