Headlines

US equities took a flying start after a bumper ADP Employment report and show gains of 0.4% to 0.7%. European equities moved mostly sideways with eking out some modest gains in the slipstream of US equities.

Companies added workers to US payrolls in March at the fastest pace since December 2014 (263k vs 185k expected) on solid gains in construction and manufacturing and at small businesses, the ADP report showed. ADP downwardly revised the February outcome from 298k to 245k.

US Non-manufacturing ISM disappointed as the headline figure fell to 55.2 from 57.6 previously. It remains a decent level but the easing is clear. Initial market reaction is minimal.

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The UK services PMI beat expectations in March, rising from 53.3 to 55 while consensus expected a stabilisation (53.4). The final EMU services PMI was unexpectedly downwardly revised from 56.5 to 56.

Greek prime minister Alexis Tsipras has called for an emergency summit of EU leaders this month if the bloc’s finance ministers fail to reach an agreement over the country’s bailout at a meeting on Friday.

The time is approaching to "not have the foot pressed down on the gas pedal, but to lift it slightly," ECB Governing Council member Weidmann said in an interview. He would welcome if bond purchases have stopped in one year.

There is no need to contemplate raising interest rates soon, according to BoE Vlieghe, because consumer finances are increasingly squeezed and the rise in inflation appears temporary.

EU finance ministers will try on Friday to find a way to deal with bad loans at European banks that drain their profits and capital and obstruct their financing of the economy. The 2008 financial crisis and subsequent economic downturn in Europe increased NPL’s of EU banks, which now amount to €1 trillion, or 5.4% of all bank loans.

South Africa’s African National Congress "closed ranks" around President Jacob Zuma after two key allies of the ruling party called for his resignation following a cabinet reshuffle that cost the country one of its investment-grade credit ratings. The ZAR remained under pressure though, with USD/ZAR moving towards the 14-mark.

Rates

Core bonds marginally lower

Global core bonds lost marginally ground today. Most European stock markets trade positive and oil prices extended their recovery. The rise of USD/JPY also suggests an improvement in risk sentiment. The final EMU services PMI was downwardly revised, but attention turned to a stronger than expected ADP employment report which confirms ongoing strength of the US economy and warrants a continuation of the Fed’s normalisation process. US Treasuries dipped to an intraday low after the release, but the move remains very limited ahead of US non-manufacturing ISM (later today), FOMC Minutes and payrolls (Friday). FOMC Minutes could give more insight on ending the Fed’s reinvestment policy. That could cause some steepening of the US yield curve. Last week’s market reaction (bull steepening) showed that the front end of the curve is also sensitive to the debate as running off the BS is an alternative for hiking rates, at least according to NY Fed Dudley.

At the time of writing, the US yield curve bear steepens with yields 0.6 bps (2- yr) to 2.3 bps (30-yr) higher. The German yield curve shifts in similar fashion with yield changes varying between flat (2-yr) and +2.1 bps (30-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany range between -1 bp and +3 bps. French bonds didn’t outperform on Marine Le Pen’s underperformance in the 2nd French presidential election debate.

The German Finanzagentur tapped the on the run 5-yr Bobl (€4B 0% Apr2022). Total bids amounted only €3.94B, below the €4.33B average at the previous 4 Bobl auctions and below the amount on offer. The Bundesbank set aside €0.78B for secondary market operations, resulting in an official bid cover of 1.2. The real bid cover was 0.98 though. The auction tailed one cent with an unchanged auction yield (-0.45%) compared to the March tap.

Currencies

USD/JPY regains 111 barrier on strong ADP report

The dollar initially held tight ranges against the euro and the yen today. The US currency was propelled by a strong ADP labour report early in US dealings. Especially USD/JPY profited. The pair returned well north of 111.00 (currently 111.40). Dollar gains against the euro was much more modest. EUR/USD currently trades in the 1.0660 area. The US non-manufacturing ISM and the Fed Minutes published will be published later today and are next references for USD trading.

Overnight, the picture of the major USD cross rates remained indecisive. USD/JPY traded in the 110.60/80 area, off yesterday’s low (110.40 area). However, risk sentiment wasn’t strong enough to trigger a further decline of the yen. At the same time, the euro also drifted slightly further north. The single currency was supported by headlines that Marine Le Pen didn’t perform well in the second French election debate. EUR/USD hovered in the 1.0680 area.

There was again no clear driver for currency trading in Europe this morning. European equities mostly traded sideways near yesterday’s closing level and without spill-over effects on other markets. The final EMU services PMI was revised slightly softer. However, at 56.00, the indictor still points to solid EMU growth at the end of Q1. EUR/USD lost a few ticks after the publication of the report, but we doubt that there was a link. The dollar was slightly better bid overall.

Early in US dealings, the ADP reported 263 000 net job growth in March. The February figure was downwardly revised from 298 000 to 245 000. Even so, the report suggests ongoing healthy US job growth. The market reaction to the ADP report is often very modest as investors prefer to wait for the official US payrolls report. However, this time the positive surprise was big enough to inspire some USD buying (even as the reaction on the interest markets was very limited). Especially USD/JPY profited. The pair trades currently in the 111.40 area going into the publication of the US non-manufacturing ISM. Later this evening USD traders will keep an eye on the Minutes of the March FOMC meeting. The gain of the dollar against the euro was negligible. EUR/USD trades in the 1.0665 area.

Sterling jumps on solid UK services PMI

Today, there was only one factor relevant for sterling trading: the UK services PMI. The January and February PMI’s showed a loss of momentum in UK services’ growth(Feb 53.3). However, the March measure surprised again on the upside of expectations and printed at a solid 55.00. Sterling jumped higher upon the publication of the report. EUR/GBP dropped from the 0.8585 area to the mid 0.85 area. In a similar way, cable jumped from the 1.2440 area to the 1.2480 area. After this reset, both EUR/GBP and cable settled again in very tight intraday ranges. In a broader perspective, sterling still holds within reach of the recent highs, but at least for now there are no follow-through gains on last week’s short-squeeze.

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