Markets
Global core bonds eke out small gains today. German Bunds outperform US Treasuries. The Bund enjoyed an unleg as BTP’s sold off in early trading. The German/Italian 10-yr yield spread rapidly widened from around 320 bps to 335 bps. 5SM leader Di Maio reiterated that key budget measures won’t be altered. The timing of his comments explains BTP’s sensitivity with the EC tomorrow publishing opinions on EMU countries’ budget plans. A new negative opinion will normally result in ECOFIN starting an “excessive deficit procedure” against Italy at its next ECOFIN meeting (Dec 5) which could ultimately result in a penalty. Risk aversion on European stock markets following weakness on WS and in Asia and a slow start to the latest retail BTP Italia issuance added to worries. The Bund profited from safe haven flows. The move halted as the Italian pressure eased, with the BTP spread retuning towards 326 bps (currently +4 bps intraday). The German yield curve bull flattens at the time of writing with yields 0.8 bps (2-yr) to 2.7 bps (30-yr) lower. The US yield curve flattens as well with yield changes ranging between +0.2 bps (2-yr) and -2.2 bps (30-yr). The test of key support levels (5-yr: 2.9%; 10-yr 3.05%; 30-yr: 3.3%) remains ongoing across the curve. US housing data were close to consensus, but confirm a cool down of the housing of market.
This morning it looked that the recent USD-decline would simply continue. EUR/USD filled offers in the 1.1470 area at the start of trading. However, the EUR/USD uptrend could not be sustained. Today’s correction was probably more a euro setback rather than a USD rebound. The EUR/USD decline coincided with a widening of Italian spreads. Spain making objections to the Brexit text maybe were also a euro negative. In US trading, global risk sentiment stayed negative, but this time the decline in core/US yields had no additional negative impact on the dollar. Contrary to negative surprise of the NAHB index yesterday, US housing data published today didn’t bring any additional negative surprise. EUR/USD kept a gradual negative intraday bias. The pair trades in the low 1.14 area. The risk-off sentiment is slightly weighing on USD/JPY, but for now yen gains remain limited. USD/JPY is trading in the 112.40 area.
BoE governor Carney and three MPC members testified on the inflation report before a Treasury committee today. It was a difficult balancing act for the BoE to give its view on monetary policy given different Brexit scenario’s without openly supporting one political option. Even so, the BoE welcomed the (potentially prolonged) transition period from the Brexit deal. Still, the BoE governor considers the threat of a chaotic Brexit uncomfortably high. The BoE will give its assessment on the Brexit plan and on a no-deal outcome to the Treasury Committee on Nov 29. However, the BoE suggested that easing of policy is far from sure, even in case of a no deal scenario as the UK economy is now in a different situation compared to the time of the referendum. The UK economy is running close to full capacity and inflation is at target. In this context, chances are bigger that the BoE will have to raise rates in case of a supply shock and/or a decline of sterling. Sterling temporarily gained a few ticks during the hearing, but those gains were limited and short-lived. Sterling traders first want more clarity on political developments before considering the reaction function of the BoE. EUR/GBP still hovers slightly below 0.89 area. USD strength is keeping cable in the mid 1.28 area.
News Headlines
US home construction increased 1.5% in October (m/m) vs. -5.5% in September against 2.2% expected. Building permits declined -0.6% last month while a drop of 0.8% was expected. Both indicators provide more evidence of a cooling of the housing market, following yesterday steep drop in NAHB homebuilder sentiment.
The Hungarian central bank (NBH) left its policy rate and deposit rate unchanged at resp. 0.90% and -0.15%, while the inflation in Hungary mounts up to 3.8%. The NBH pursues a 3% inflation target, but allows changes within the range of 2%-4%. The Hungarian forint remains near opening levels, with investors awaiting the NBH’s press release.
