Markets
Global core bonds gain ground today as risk sentiment is deteriorating. This morning, German industrial production for December disappointed again. Later, the European Commission slashed its 2019 growth forecasts for all the major euro zone economies, including Germany and Italy. The latter topped the list with 2019 growth being revised to a meagre 0.2%. Meanwhile, Italian FM Tria said the economy is experiencing a momentary stall, not a true recession. Nonetheless, Italian BTP’s fell while German Bunds rose. The German yield curve edges lower with moves up to -3.8 bps (10-yr). UK Gilts are rising too as the Bank of England has cut its growth forecast. Peripheral spreads over the German 10-yr yield widen, with Greece (+10 bps) and Italy (+12 bps) underperforming. The grimmer sentiment in Europe supported US Treasuries as well. The US yield curve moves south with changes in the range of ‑2.5 bps (30-yr) to -3.5 bps (5-yr).
The post-Fed EUR/USD trading paradigm simply continued. Negative headlines on the EMU/EU economy continue to outweigh a softer Fed and potential less negative news from the US. Poor German production data and the EC downgrading the 2019/2020 growth forecasts were the catalysts for further EUR/USD losses. EUR/USD tested the 1.1325 area (currently near 1.1345). USD/JPY again failed regain the 110 barrier as lower core yields and a risk-off sentiment support the yen.
EUR/GBP developed an erratic sideways trading pattern in the high 0.87 ahead of the BoE policy announcement. The BoE left its policy rate unchanged at 0.75%.The bank cut its growth and inflation forecast for 2019 both due to the global slowdown and uncertainty on Brexit. At the same time the BoE kept its guidance for limited/gradual rate hikes over the 2019/2022 horizon in case a no-deal Brexit can be avoided. EUR/GBP briefly tested the 0.88 area after the BoE decision, but sterling soon reversed the post-BoE loss and even rallied. Sterling bulls apparently found comfort in the BoE holding on to, albeit limited, policy tightening in current uncertain environment. So, today’s BoE message can also be understood that there is room for catch-up demand (and investments) in case a no-deal Brexit can be avoided. This is a (conditional) sterling supportive message. EUR/GBP trades currently in the 0.8750 area. Of course, for now, the condition of an orderly Brexit is not yet fulfilled. So, we look out whether sterling can keep today’s gains as the Brexit sage develops, starting with today’s meeting between EU’s Juncker and UK PM May.
News Headlines
The EC slashed its EMU growth forecast from 1.9% to 1.3% in 2019 and from 1.7% to 1.6% in 2020 with downside risks. These reflect external factors, such as trade tensions and the slowdown in emerging markets, notably in China, concerns about the sovereign-bank loop and debt sustainability in some euro area countries. The possibility of a disruptive Brexit creates additional uncertainty. Among the larger Member States, downward revisions for growth in 2019 were sizeable for Germany, Italy, and the Netherlands.
The BoE unanimously decided the keep its policy unchanged. The UK central bank cut 2019 growth forecasts from 1.7% to 1.2% and from 1.7% to 1.5% for 2020. This year’s inflation forecast was cut from 2.2% to 1.8%. Mounting Brexit uncertainty and the global slowdown caused the dovish turn which was also visual in the expected rate path. New forecasts suggested that 1 à 2 more rate hikes might be needed in the next three years.
The Czech National Bank voted 5-2 in favour of keeping rates unchanged at 1.75%. The two dissenters argued in favour of a 25 bps rate hike. External risks are the CNB’s main concern. More certainty is needed before resuming the tightening cycle. The CNB lowered its growth forecast from 3.3% to 2.9% this year with a slightly lower plotted inflation trajectory (2% by Q1 2020). The 2019 average forecast for EUR/CZK changed from 24.70 to 25.
