Of late, European/German buods stayed resilient, outperforming US Treasuries as US yields trended again cautiously higher. Today, European yields finally started a catching up move. We didn’t see one specific reason. Several smaller factors might have been at work. A new up-leg in oil prices (and to a lesser extent in some other commodities) might have stoked inflation fears among investors in European bonds. Supply in Spain and France were also a bond negative in a daily perspective. From a technical point of view, the Bund finally dropped below Monday’s correction low, leaving a MT consolidation pattern. This break probably triggered some stop-loss repositioning on the March Bund rally. Also worth mentioning, the flatting trend on the US yields curve has halted. At the time of writing, the US yield curve bear steepens with 2-year yield little changed and the 30-year yields rising 3.7bp. German bonds show a similar move, but underperforming US Treasuries with 2-year yields rising 1.2bp and the 10-y yield rising 5 bp. Intra-EMU spread changes remain very limited across different countries with Spain slightly underperforming (+2bp).
As was the case earlier this week, there was again no clear driver for USD trading. EUR/USD again tested the 1.24 area early this morning, but there were no follow-through gains even as interest rates today moved slightly in favour of the single currency. EUR/USD hovered in a tight sideways range in the upper half of the 1.24 big figure. USD/JPY jumped to the 107 area in Asia this morning, but also this move could not be extended. USD/JPY currently trades in the 107.40 area. The rise in core yields (both in the US and Europe) might be a tentative negative for the yen. At the same time equities didn’t provide much support for the likes of EUR/JPY and USD/JPY as the equity rebound shifted into a lower gear.
Yesterday, sterling corrected lower on softer than expected UK CPI data. Today, the March UK retail sales were published. Sales again missed the consensus by a big margin. The headlined figure declined 1.2% M/M, reducing the Y/Y gain from 1.5% to 1.1% (1.9% Y/Y was expected). However, there was a good excuse for the poor sales performance: weather conditions were extremely harsh for the time of the year. Sterling briefly lost ground after the publication of the report, but the move had no strong legs. Sterling soon reversed the initial loss. EUR/GBP even returned to the 0.87 area. Cable dropped temporarily below the 1.42 handle, but the pair currently trades again in the 1.4235 area. Underlying sentiment on sterling remains quite constructive given disappointing data of late.
German Chancellor Angela Merkel and French president Macron indicated that they will make a united proposal for the June 19 EU summit on how they want further reforms in the EMU to proceed as both leaders agreed that the euro zone was “not yet sufficiently crisis-proof”.
UK retail sales disappointed again in March. Headline sales declined -1.2%M/M. Cold weather was partially to blame. Even so, retail sales were poor in three of the last four months. So, one can expect private consumption to have only a low contribution to Q1 UK GDP growth.
US eco data were close to expectations. Weekly jobless claims were little changed at 232k in the week ending April 14. The Philly Fed business outlook was marginally stronger than expected improving from 22.3 to 23.2 (21 was expected).