Global core bonds initially thrived on yesterday’s momentum generated by the ECB meeting. President Draghi confirmed recent comments, suggesting that the EMU growth peak is behind us. The ECB’s sidelined stance in order to find out whether the setback is permanent, indicates little haste to announce changes to its forward guidance/policy (only in July?). EMU eco data printed mixed with disappointing Q1 French GDP, but decent EC EMU confidence data. Trading slowed to a trickle going into Q1 US GDP (2.3% Q/Qa vs 2.1% Q/Qa). Core PCE rose to 2.5% Q/Qa from 1.9% Q/Qa and caught investors’ attention while being in line with forecast. The US Note future temporary lost some ground. Monday’s March PCE deflators (both headline & core) are expected to print both above 2% for the time in over six years. The Fed might acknowledge this development by upgrading the inflation assessment in the policy statement. We think that US yields will test key resistance levels next week. The US yield curve flattens with yield changes ranging between +0.6 bps (2-yr) and -2.6 bps (30-yr). The German yield curve bull flattens with yields 1 bp (2-yr) to 2 bps (30-yr) lower. 10-yr yield spread changes vs Germany are close to unchanged.
EUR/USD and USD/JPY extended yesterday’s trading pattern. The dollar maintained the benefit of the doubt. The euro remained in the defensive. European data were mixed, but at least not strong enough to restore confidence in the euro after yesterday’s breach of EUR/USD 1.2155. At the same time, US GDP was not too bad. The report was no Grand-Cru, but slightly above consensus. ST interest rate differentials widened further in favour of the dollar. EUR/USD touched a new ST correction low after the US GDP release, but for now there are no additional follow-through gains. EUR/USD trades in the 1.2080 area. USD/JPY hovers in the lower half of the 109 big figure, holding the relatively tight range that is in place since Wednesday evening. Even so, the technical picture for the dollar improved this week, with both EUR/USD and the trade-weighted dollar clearing technically relevant levels.
Sterling performed rather well over the previous days despite mixed eco data and as governor Carney sounded less convinced that the BoE should raise rates at the May meeting. EUR/GBP returned below the 0.87 handle yesterday /this morning. However, sterling bulls then could no longer ignore the bad news. The estimate of UK Q1 growth printed at only 0.1% M/M and 1.2% Y/Y (vs 0.3% M/M & 1.4% Y/Y consensus), down from an already mediocre 0.4% Q/Q in Q4. The harsh winter weather was partially to blame, but the ONS indicated that other factors were also at work, suggesting a sluggish underlying performance of the UK economy at the start of the new year. Poor Q1 growth evidently raised further doubts on the preparedness of the BoE to raise rates at the May meeting. Sterling fell off a cliff. EUR/GBP jumped to the 0.8785 area (currently 0.8775). Cable was in free-fall and dropped from the 1.3935 area to touch an intraday low below 1.3750. We look out whether EUR/GBP will regain the 0.88 mark. IF so, it would be an additional technical warning for sterling.
EMU inflation could rise slower than earlier thought but growth may stay resilient to the recent slowdown, the ECB’s Survey of Professional Forecasters showed, underpinning the bank’s call for patience in removing stimulus.
US growth in the first quarter (2.3% annualized) slightly topped expectations of 2%. Growth was mainly driven by private investment and exports whereas private consumption (1.1% Q/Qa) contributed only marginally.