Markets
Global core bonds lost ground today as risk sentiment flourished. Chinese manufacturing PMI was strong. Investors embraced the results, leading bourses higher with Chinese outperforming (up to +3%). The uptick in sentiment pushed core bonds down before the EU opening. The final reading of the March EMU PMI’s and the EMU consumer inflation data for March (0.8% MoM vs. 0.9% expectations and down from 1.0% in February) printed weaker than expected, preventing German Bunds from more losses. The German yield curve is bear steepening with changes up to +4.0 bps (30-yr). US Treasuries opened lower too and moved with a cautious downward bias afterwards. February retail sales disappointed but they were outbalanced by a strong upward revision of the February result, keeping the market impact limited. Investors awaited the more forward-looking March ISM Manufacturing index. The confidence gauge surprised on the upside (infra), further pushing US Treasuries down. The US yield curve is moving higher with changes in the range of +5.1 bps (30-yr) to +6.2 bps (10-yr). Peripheral spreads over the German 10-yr yield are stable, with Greece (-5 bps) outperforming.
EUR/USD was well supported today, profiting from a benign risk environment that emerged from better than expected Chinese (manufacturing PMI’s). The common currency showed little interest in even worse final German, French and EMU manufacturing PMI’s. Slowing core/headline inflation to a mere 0.8% MoM/1.4% YoY (vs. 0.9%/1.5% expected) had virtually no impact either. The pair peaked at 1.1250 before partially paring gains around noon. Attention shifted to the US with lower-than-expected retail sales (Feb). The (dollar negative) reaction was short-lived as beefed up January data (up to 0.6% points!) compensated for missed estimates. A strong March manufacturing ISM supported the dollar further afterwards. The indicator printed better than anticipated (55.3 vs. 54.2 in February). The pair is currently trading at 1.120, close to opening levels. USD/JPY jumped above 111 after the release.
The brexit impasse is clearly having real economic effects as today’s UK PMI’s showed. The issue is still far from resolved with parliament holding for a second time a day of indicative votes later today, after an inconclusive first round. MP’s have proposed 9 alternatives (down from 18 in the first round) to May’s deal, some of them very similar the ones proposed last week. It is up to Speaker of the House Bercow which ones will eventually get discussed and voted on. May is awaiting tonight’s outcome before deciding on her next steps (a fourth try?). Sterling meanwhile is trading a pattern similar to last week. EUR/GBP slips (sterling advances) ahead of the parliamentary voting. The couple stabilized at 0.857. The risk is real though that tonight’s results fail to clear the brexit path going forward. Even in the case of a parliamentary majority for any of the alternatives, it is still up to May to decide whether or not to comply with the outcome. Even more important, any deal other than May’s requires EU approval. We are therefore cautious to buy into current sterling strength.
News Headlines
UK’s manufacturing PMI confidence (55.1) crushed markets estimates of 51.2. The rebound however is less cheering then it looks. British manufacturers stepped up preparations for potential disruptions related to (a disorderly) Brexit. Output, employment and new orders rose at increased rates as they and their clients are building safety inventories, according to IHS Markit.
US ISM manufacturing confidence recovered more than expected in March (55.3 vs. 54.5) as February’s weather related effects faded. High profile subcomponents also showed solid gains, with new orders rising from 55.5 to 57.4 and employment increasing sharply from 52.3 to 57.5.
