Markets
Global core bonds record gains in a daily perspective, but they mainly occurred during Asian trading (US Treasuries) or in the European opening (German Bund). Fed chair Powell’s comments were all over the place, but we warned about over interpreting them. We merely think of them as a correction to his out-of-line October declaration that the policy rate was still way out of neutral levels. Current market positioning, discounting only 1 additional hike in 2019, is too soft. Core bonds couldn’t build on those starting gains despite lower than expected German (CPI) and US (PCE) inflation numbers. US yields lose between 0.6 bps (2-yr) and 3.3 bps (10-yr) on a daily basis. German yields trade 0.9 bps (2-yr) to 2.2 bps (10-yr) lower. 10-yr yield spread changes vs Germany are slightly narrower with Greece outperforming (-4 bps).
Global (FX) investors tried to make up their mind today on yesterday’s presumed ‘change in guidance’ from Fed-chairman Powell. The EUR/USD cross rate is looking for a new equilibrium in the upper half of the 1.13 big figure. The pair came close to the 1.14 barrier this morning, but the euro lost temporarily ground (tentatively below consensus German CPI?). The US currency came again under pressure and revisited the 1.14 big figure after the publication of the US spending in income data. Spending and income growth were above consensus in October. However, the core PCE deflator was slightly softer than expected at 1.8% (1.9% was expected). The soft inflation figure, at the margin, can be considered as reinforcing the case of the Fed slowing the pace of policy normalization. Interest rate differentials also narrowed slightly further in the disadvantage of the dollar. EUR/USD is changing hands in the 1.1375 area. This is a loss of one big figure for the dollar compared to yesterday. However in an intraday perspective, the US currency didn’t lose that much interest rate support anymore. USD/JPY also drifted further south and settled in the 112.20/40 area.
Sterling also remained under pressure both against the euro and the dollar. The positive global risk sentiment in the wake of the Powell comments this time didn’t help sterling. Over the previous days, sterling entered some kind of wait-and-see pattern as even as markets were well aware that that an approval of the Brexit deal in the UK Parliament would be very difficult. The UK currency lost further ground today, as UK PM May warned members of a committee of Parliament that voting down her deal on December 11 contains the risk of no deal at all. EUR/GBP jumped north of 0.89, but trades currently again near this big figure. Cable dropped back below the 1.28 mark, despite broad underlying USD weakness.
News Headlines
The Swedish economy contracted unexpectedly in Q3. The economy shrank -0.2% QoQ while markets expected a 0.2% expansion. Q2 growth has also been revised downwardly (from 0.8% to 0.5% QoQ). Growth slowed to 1.6% (2.2% expected) on an annual basis, down from an upwardly revised 2.7% YoY.
After signaling the possibility of early repayments already in October this year, the Portuguese government plans to pay back all of its 4.6b debt to the IMF by the end of 2018. The prime minister Costa praised his government’s fiscal approach that made the repayment possible while still supporting growth.
Inflation data fell short of expectations. German HICP experienced an oil driven fall from 2.4% to 2.2% YoY while markets expected a softer landing at 2.3% YoY. US PCE core inflation ebbed from a downwardly revised 1.9% to 1.8% YoY (vs. 1.9% expected). The Fed’s favorite inflation gauge (PCE deflator) stabilized at 2.0% YoY while a small uptick was expected. On a brighter note, US income and spending data topped expectations while EMU economic confidence fell a little less (109.5) than anticipated (109.1).
