Markets
Global core bonds are trading mixed today with US Treasuries underperforming German Bunds. Risk sentiment turned positive on good corporate results. With the US-Sino high-level trade talks commencing today and the Federal Reserve’s first policy meeting of 2019 lined up for tonight, position taking remained muted. German Bunds opened with a downward tendency. EMU economic confidence gauge printed below expectations, the German government lowered its 2019 growth forecast and the German consumer inflation decelerated in January. The German Bund recovered to opening levels. The German yield curve flattens with changes varying between -1.6 bps (30-yr) to +0.8 bps (2-yr). US equities opened higher (good results of Boeing, McDonalds) and ADP employment growth surprised on the upside. However, the focus is turning to the this evening’s Fed meeting. Investors will carefully weigh chairman Powell’s words on possible alterations to the current auto-pilot reduction of the Fed balance sheet and the central bank’s intentions on future rate hikes. US Treasuries edged lower, pushing the US yield curve higher. Changes mount up to 1.1 bps (10-yr).In Italy, the temperature is mounting up again as tensions arise between the two coalition partners 5SM and Lega. Italian BTP’s initially edged lower but paired intraday losses after a successful 5-/10-yr bond sale. The Italian spread over the German 10-yr yield tightens 2 bps.
Trading in the major USD cross rates again developed in tight ranges today, even as there was quite a series of interesting data. FX traders were simply counting down to this evening’s Fed policy decision and press conference. In technical trade, EUR/USD drifted in the 1.1430 area during most of the European morning session. French Q3 GDP was stronger than expected, but EC confidence remained weak. Later, German/EMU yields and the euro declined a tad as the German government downwardly revised its 2019 growth forecast from 1.8% to 1.0%. However, especially the euro downtick was extremely limited and short-lived. A similar reaction occurred on soft January German CPI data published early afternoon. Finally, it was a strong US ADP labour report that tilted the balance in favour of the dollar. EUR/USD trades currently in the 1.1415 area. USD/JPY jumped higher and is currently trading in the 109.70 area. The degree of Fed flexibility on interest rate hikes and/or the balance sheet roll-off might decide on the next USD move.
Sterling stabilized off the correction lows touched after the vote on the Brexit amendments in the UK Parliament yesterday. UK May returning to Brussels in attempt to renegotiate the Backstop clause probably triggers a new period uncertainty/low visibility on the Brexit process. Even so, the rather muted reaction of sterling probably suggests that at least a substantial part of market participates assume that a no-deal Brexit can still be avoided in one way or another. EUR/GBP is currently trading in the 0.8725 area. Cable is trading below the 1.31 handle.
News Headlines
A series of data today showed German inflation slipping in January with -1.0% MoM (1.7% YoY). The decline is most likely oil driven. EMU economic confidence disappointed slightly, falling from 107.4 to 106.2 vs. 106.8 expected. Belgium revealed 2018Q4 GDP growth to land at 0.3% QoQ (1.2% YoY). Finally, the US published another strong ADP job report (213k vs 181k expected)
Republican and Democratic members of Congress open negotiations today to find a permanent government funding solution after Trump temporarily lifted the shutdown for 3 weeks last Friday. Trump already warned this morning that not considering his wall funding during the discussions would be a waste of time. A deal should be wrapped up by February 10 for legislation to get approved in time (i.e. before February 15).
