The sell-off on core bond markets continued today. They suffered from higher inflation expectations and good US eco data. US Treasuries today underperformed German Bunds. The main move occurred during US trading. April retail sales printed in line with expectations (control group 0.4% M/M), but March readings faced an upward revision. May Empire manufacturing comfortably beat consensus (20.1 from 15.8 vs 15.0 expected). Forward looking details suggest more economic strength in Q2 while inflationary pressures are building. Data keep the possibility of three more US rate hikes this year more than alive and suggest that the US economy could outperform this year thanks to the late cycle fiscal boost. Dallas Fed Kaplan, hawkish non-voter, suggested raising rates towards neutral levels (2.5%-3%) as the Fed met its dual mandate. Within the next year to year and a half, the FOMC should discuss whether it’s necessary to hike them further into restrictive territory. US yields add 2.1 bps (2-yr) to 5.2 bps (10-yr) at the time of writing. The US 10-yr yield is inches away from testing key 3.07% resistance. A sustained break higher implies more upside from a technical point of view, targeting 4% in the medium term. The German yield curve bear steepens with yields 1 bp (2-yr) to 3.2 bps (30-yr) higher.
Over the previous days, the dollar rally took a breather especially against the euro. However, several investors apparently considered yesterday’s rejected test of the 1.20 barrier as a signal to enter new USD long positions and, to a lesser extent, to sell the single currency. The EMU eco data were mixed. ZEW investor sentiment was close to expectations and so was EMU Q1 GDP (0.4% Q/Q). German Q1 growth (0.3% Q/Q) disappointed. Even so, the EMU data didn’t prevent a further rise in core yields. The US 2-yr yield set a new cycle top at 2.57%. The US 10-yr yield came ever closer to the key 3.07 % resistance. German bunds suffered, too, but interest rate differentials still widened slightly in favour of the dollar. The rise both of the dollar and of core yields continued after the release of the US retail sales and a good Empire manufacturing survey. EUR/USD dropped further below 1.1850. The 1.1823 correction low is again on the radar. USD/JPY jumped well north of 110 even as US equities came under pressure in the run-up to the opening of cash trading. The pair trades currently in the 110.25/30 area. The dollar remains in the drivers’ seat.
Sterling was sold in the early hours of trading as investors awaited the UK labour data, including the closely watched wage growth data. EUR/GBP jumped temporary to the 0.8815 area. UK job growth was strong, but wage growth was again perfectly in line with expectations at 2.9% Y/Y (ex-bonus measure). The report was good enough to prevent further sterling losses. Later in the session, EUR/GBP even dropped back below the 0.88 mark, but this move was mainly due to EUR/USD selling at that time. Cable dropped to the 1.35 area on broad-based USD strength. In the end, the UK labour report was ok, but it was not strong enough to change market expectations on the timing of a rate hike by the Bank of England.
In a much anticipated overhaul of the Volcker rule, the Fed and other regulators are planning to drop an assumption written into the original rule that positions held by banks for less than 60 days are speculative — and therefore banned, the people said. Instead, banks would have leeway to conclude that their trades comply with the rule, putting the onus on regulators to challenge such judgments, the people said. (BB)
Central Europe’s economies steamed ahead in the first quarter as rising wages in tightening labour markets propelled household spending, leading to faster-than-expected growth in Poland (1.6% Q/Q) and Hungary (1.2% Q/Q) and still decent expansion in the Czech Republic (0.5% Q/Q). (Reuters)