Markets:

Global core bonds eked out small gains today. The German Bund found support from an intraday deterioration of risk sentiment on stock markets. Technically, the contract tests the 157.43 resistance area which coincides with a test of 0.62% support of the German 10-yr yield. The US Note future temporary outperformed the Bund after media reported that US President Trump sacked US Secretary of State Tillerson. The news arrived about simultaneously with US CPI data which printed in line with expectations. Headline inflation accelerated further above the Fed’s 2% inflation goal (2.2% Y/Y). The safe haven spike on the latest political surprise by President Trump was short-lived with the US Note future returning to this morning’s levels ahead of tonight’s 30-yr Bond auction. The German yield curve steepens at the time of writing with yield changes ranging between -1.2 bps (2-yr) and +0.4 bps (30-yr). Changes on the US yield curve are even smaller. 10-yr yield spread changes vs Germany are nearly unchanged. Italian BTP auctions went relatively well despite the political deadlock. Greek bonds didn’t profit from the (anticipated?) upbeat message from the Eurogroup. SLOVGB’s hold firm despite the developing political crisis.

EUR/USD hovered in a tight range in the lower halve of the 1.23 big figure this morning with investors counting down to the key US inflation report. US February inflation printed exactly in line with expectations (0.2% M/M and 2.2% Y/Y for the headline, 1.8% Y/Y for core CPI). In line with the reaction on the US payrolls report on Friday, the market saw the (CPI) glass half empty. US yields and the dollar declined. The market concluded that inflation remains modest given the context of positive growth. At least for now, markets see no reason to consider faster Fed rates hikes than what is currently discounted. US president firing Foreign Secretary Tillerson was a temporary negative for the dollar, too. EUR/USD trades currently in the 1.2375 area. USD/JPY traded with an upward bias ahead of the CPI release. Political tensions due to a scandal within the Japanese government was/is a mixed factor for the yen. This morning it was considered yen positive. However later in the session, yen longs (USD/JPY shorts) were wrong-footed by a USD/JPY short squeeze. USD/JPY rebounded well above the 107 mark. The pair returned part of the earlier gains after the US CPI release (106.85 area). Despite today’s USD reaction, we don’t see the inflation report changing the Fed’s intentions on policy normalization.

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The focus for sterling trading was on the half year UK budget statement of UK finance minister Hammond. The OBR revised 2018 growth slightly higher to 1.5% from 1.4%. Expectations for 2019/2020 growth were left unchanged at 1.3%. Minister Hammond indicated that he hoped the UK economy could beat the OBR forecast. Sterling gained a few ticks after the publication of the budget statement. However, we don’t expect the budget exercise to have a lasting impact on sterling. EUR/GBP trades in the 0.8860 area. Cable (1.3965 area) is again nearing the 1.40 barrier. However, this is due to dollar weakness rather than anything else.

News Headlines:

The EU could get an exemption from US steel and aluminum tariffs if the union was to be considered a reliable partner in fighting over-capacities, among other criteria, Politico reports, citing three unidentified people briefed on the outcome of US Trade Representative Lighthizer’s talks with European Trade Commissioner Malmstrom.

President Trump said that Rex Tillerson is out as secretary of state, after months of speculation over his fate, and that CIA Director Pompeo would be nominated to lead the State Department.

US February CPI printed in line with expectations both for the headline (0.2% M/M, 2.2% Y/Y) and core reading (0.2% M/M, 1.8% Y/Y/. US consumer price growth slowed from January on a monthly basis amid a decline in gasoline prices and a moderation in the cost of rental accommodation. NFIB small business optimism improved more than forecast, from 106.9 to 107.6.

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