Markets
Global core bonds are losing ground today with US Treasuries underperforming German Bunds. Risk sentiment turned positive after constructive signals from the US-Sino trade talks. EU equities moved higher, weighing core bonds down. Still the move in German Bunds remains limited. ECB heavyweight Benoit Coeuré acknowledged that the economic slowdown in the euro area is “clearly stronger and broader” than expected, which means the inflation “path also will be shallower”. So the ECB “has to adapt to that”. He suggested policy rates should remain low for longer. He also indicated that the ECB is discussing a new TLTRO. That’s the strongest signal so far that the central bank is working on this tool. The German yield curve slightly steepens with changes varying between -0.3 bps (2-yr) to +0.8 bps (30-yr). However, a new TLTRO has more impact for peripheral countries. Italian spread over the German 10-yr yield completely reversed an intraday widening (+10 bps). US Treasuries moved sideways throughout the day but fell on a strong February Empire Manufacturing, pairing some of the gain after yesterday’s disappointing retail sales. The move down halted after weak January US industrial production numbers (-0.6% M/M vs. +0.1% exp.). The US yield curve moved higher with changes up to +2.0 bps (10-yr).
FX traders looked for direction today after yesterday’s USD sell-off in the wake of very poor US retail sales. In Asia, headlines on the US-China trade talks were cautious, even negative. The tone improved later as officials confirmed talks will continue in the Washington next week. Positive news on global trade can be considered positive for both the US and for Europe. However, the US/German (EMU) yield spread re-widened and supported the dollar at that time. Euro-sceptic headlines from Italian MP Borghi weighed on Italian bonds and were a secondary negative for the euro. During afternoon session, headlines initially still favoured the dollar rather than the euro. ECB’s Coeure did speak soft on inflation/monetary policy and mentioned the ECB discussing new TLTRO’s. More or less at the same time, the NY Empire manufacturing survey printed stronger than expected (8.8). EUR/USD touched a new correction low in the 1.1235 area. However, US production data were again very weak blocking an intraday rise of US yields and of the USD dollar. EUR/USD is trading in the 1.1275 area. A new set of TLTRO’s also might be considered a supportive factor for EMU assets and maybe even for the euro. USD/JPY shows no clear trend and is trading in the 100.40 area.
Sterling rebounded slightly even as yesterday’s vote in the UK Parliament confirmed the profound division among UK politicians on how to solve the Brexit stalemate. UK January retail sales rebounded sharply after dismal December sales. The impact on sterling was limited. It is too early to draw any conclusions for BoE policy as long as Brexit uncertainty remains as big as it is currently. EUR/GBP is trading in the 0.8790 area. Cable hovers near the 1.28 pivot.
News Headlines
The Spanish Prime Minister Sanchez pulled the plug on his minority government. He called for snap elections on Friday morning after Catalan parties refused to support his 2019 budget bill in parliament last Tuesday. Spain is scheduled to vote on April 28, just weeks ahead of the European elections.
Chinese President Xi Jinping said “important progress” has been made during this week’s trade talks. The White House sounded similarly optimistic but added that work remained. Parties agreed to continue talks next week in Washington ahead of the March 1 deadline. Equities staged a strong intraday turnaround after the news got public.
US Empire Manufacturing recovered in February from last month’s blow. The headline index climbed to 8.8, up from 3.9 in January and beating expectations (7.0). Current situation subcomponents were mixed (new orders up, employment down) but the survey revealed striking optimism about the economic environment going forward.
