Yesterday’s core bond sell-off slowed today. The US Note future underperformed a flat-trading Bund, but there were no strong trading themes. The eco/event calendar provided no impetus. Declining stock and oil markets suggested a better performance of core bonds. After yesterday’s repositioning lower, we might have entered calmer trading conditions ahead of next week’s ECB meeting. The US yield curve bear steepens with yields 1.3 bps (2-yr) to 2.5 bps (30-yr) higher. The US 10-yr yield (2.93%) approaches this year’s high (2.95%) which is first important resistance. Changes on the German yield curve are modest, varying between -0.5 bps (5-yr) and +1.1 bp (30-yr). 10-yr yield spreads vs Germany are close to unchanged.
Yesterday afternoon’s dollar rebound continued and even accelerated without obvious trigger. There is no one-on-one link between the dollar and interest rate differentials with other majors like the euro. That said, the absolute interest rate differential at the short end of the curve is becoming huge, making it expensive to hold dollar shorts (2y US yield at 2.44%, 2y US/German interest differential touching 3%!). In the same context, the market is ever more shifting in the direction of three additional Fed rate hikes this year, despite recent global uncertainty. Other factors like a topping out pattern in the oil price maybe helped some further USD gains. Whatever the reason, USD momentum is clearly improving. EUR/USD dropped below the 1.23 barrier. USD/JPY is also holding up well even as the equity rally is losing steam. USD/JPY is trending higher in the 107 big figure.
Sterling was looking for a new equilibrium today after BoE’s Carney yesterday gave an interview that made markets question the scenario of a May BoE rate hike. Sterling remained under pressure early in the session as interest markets discount only a probability of about 50% for a May rate hike, compared to 80% before the Carney comments. EUR/GBP rebounded to the high 0.87 area. However, the sterling decline gradually eased. BoE Sauders in a speech agreed that any further policy normalization should develop in a gradual way. Even so, he maintained his call for an ‘early’ rate hike as he saw a capacity constraints building in the UK economy. The immediate reaction of sterling was limited an short-lived. EUR/GBP hovers in the mid 0.87 area. Cable is holding a relatively tight sideways range in the mid 1.40 area.
BoE Saunders is sticking to his guns, arguing for further interest-rate increases the day after Governor Carney came out with a surprisingly cautious outlook. “We do not need to set policy in a way that will create rising spare capacity or higher unemployment. But our foot no longer needs to be so firmly on the accelerator.”
US President Trump has blasted the oil producer group Opec for driving oil prices to the highest level since 2014, saying that crude prices have been driven “artificially” high. Brent crude declined from $74/barrel to the $73/barrel area.
Canadian eco data disappointed. Core retail sales stabilized on a monthly basis in February (vs +0.4% M/M increase expected). Headline inflation hit the highest level in three year (2.3% Y/Y), but fell short of expectations (2.4% Y/Y). The Canadian dollar continued the correction lower which started after Wednesday’s BoC meeting. USD/CAD cruised above 1.27.