Rates: Bund ends consolidation phase
Core bonds lost ground yesterday with Bunds underperforming US Treasuries. The move suggests an end of the consolidation phase for the Bund which started end March. Rising inflation expectations can send the German yield further up. The US 10-yr yield approaches the upper bound of the 2.7%-2.95% trading band.
Currencies: BoE’s Carney blocks sterling rebound as he questions May rate hike
Yesterday, the dollar got the benefit of the doubt even as interest rate differentials moved in favour of the euro. Today, the eco calendar is thin. Even so, some further repositioning in favour of the dollar might be on the cards. Sterling finally tumbled sharply lower as BoE’s Carney indicated that the BoE hasn’t decided on the timing of a next rate hike.
The Sunrise Headlines
- US stock markets lost 0.35% to 0.78% yesterday with Nasdaq underperforming on a disappointing outlook from Apple’s main chip supplier. Asian bourses trade negative as well with China underperforming (> -1%).
- BoE Carney indicated that financial markets were wrong to believe an interest rate rise in May was a foregone conclusion. Sterling lost ground with EUR/GBP north of 0.8750 and GBP/USD below 1.41.
- EU officials are set to reject a potential UK solution to the crucial issue of what happens to the Irish border after Brexit (maintaining an invisible border to the whole of the UK), deepening the stalemate in negotiations. (BB)
- The Trump administration is considering declaring a national economic emergency to impose new restrictions on Chinese investment as part of a trade crackdown on Beijing, according to a senior US Treasury official. (FT)
- Japanese inflation slowed for the first time since July 2016. The key national CPI ex fresh food rose by 0.9% Y/Y, from 1% Y/Y in February, providing the BoJ with a fair enough reason to maintain its stimulus.
- German economic growth could slow slightly in the first quarter, but the upswing in Europe’s largest economy remains robust and broad-based thanks to strong domestic and foreign demand, the finance ministry said. (Reuters)
- Today’s eco calendar contains German PPI data and EMU consumer confidence. Chicago Fed Evans is scheduled to speak.
Currencies: EUR/USD Rebound To Slow Post-Fed Minutes
Carney blocks sterling rebound
There was initially again no clear guide for USD-trading yesterday. EUR/USD held a tight range in the upper half of the 1.23 big figure. The dollar finally captured a better bid later in the session. We didn’t see any high profile news. The move coincided with a slight decline in the oil price and with a correction on US equity markets. The dollar maybe played some kind of temporary safe haven role. EUR/USD close the session at 1.2345. USD/JPY finished little changed at 107.37.
Asian equities remain in the defensive overnight. Technology shares take the lead in the decline. China underperforms again. Japanese March inflation data remain soft, but were in line with expectations (0.9% Y/Y for the measure ex Fresh food). The moves in the major USD cross rates are modest. Even so, the USD currency is holding up well given the volatility/uncertainty in several other markets.
There are hardly any important data in EMU or in the US today. We aren’t convinced that this will be a guarantee for calm trading. Yesterday’s moves in core bonds suggest that investors are adapting positions. The dollar held up well in this process even as the interest rates moved in favour of the euro. We look out whether this pattern persists. A further catching up move with European bonds underperforming Treasuries is not per se a positive for the euro. We also keep an eye at the gyrations in commodities and equities. The jury is still out, but in a short-term perspective, we have the impression that a renewed rise in volatility might benefit the dollar rather than euro.
Sterling (EUR/GBP) initially held near the levels after Wednesday’s soft inflation data. March UK retail sales disappointed again. However, poor weather conditions were to blame. The market assumed that soft data wouldn’t question a May rate hike anymore. Sterling even rebound with EUR/GBP returning to the 0.87 area. BoE’s Carney created doubts after the European close by indicating that the BoE hasn’t decided on the timing of a next rate hike yet. Sterling was hammered. EUR/GBP jumped to the 0.8765/70 area. There are no UK eco data today. Yesterday’s comments of BoE Carney broke the sterling positive momentum. The extensive test of the 0.8650 range bottom is rejected. Short-term, some further unwinding of sterling longs ahead of the BoE meeting might be on the cards. Brexit noise might also resurface.
USD (tradeweighted): USD to trend higher in the range?
