Markets:
Global core bonds are mixed today with German Bunds outperforming US Treasuries. The risk-off that prevailed markets yesterday continued overnight but with clear signs of moderation. Core bonds opened lower. Despite the equity markets catching a breath today, bond markets resumed their uptrend. A disappointing German ZEW expectations result added to market pessimism. German Bunds already paired most of its intraday losses, when comments by Italian deputy PM Salvini pushed them into green territory. He said that Italy is ready to break EU fiscal rules if it’s necessary to boost employment. The German yield curve is moving lower with losses up to -1.2 bps (2-yr). US Treasuries haven’t been able so far to make up for intraday losses. The NFIB Small Business Optimism printed above expectations in April, but couldn’t rattle investors. Meanwhile, President Trump encouraged the Federal Reserve in a tweet to ‘match’ the actions of the PBoC, meaning lowering interest rates. The US yield curve is close to opening levels with changes in the range of +0.9 bps (30-yr) to +1.2 bps (10-yr). Peripheral credit spreads over the German 10-yr yield are stable with Italy (+2 bps) underperforming.
Global risk-off sentiment eased even as there is no sign of any profound progress in the US-China trade dispute yet. However, at least for now, the episode of reciprocal tariff hikes is apparently discounted. Equities rebounded and the decline in US yields halted. Market anticipation on (substantial) Fed rate cuts weighed on the dollar of late. In this perspective, the US currency received some breathing space today. EUR/USD settled in the 1.1230/40 area during the European morning session. This afternoon, the news flow turned slightly USD supportive and, even more, euro negative. US NFIB small business confidence was stronger than expected. Meanwhile, Italian PM Salvini openly advocated for Italy to break EU deficit rules if it would be necessary to reduce Italian unemployment. EUR/USD dropped from 1.1240 to fill bids in the low 1.12 area (currently 1.1215 area). The balance tilted from USD weakness to euro softness. USD/JPY initially rebounded on the better global sentiment, but returned part of the earlier gains this afternoon. The pair is trading in the 109.50 area.
EUR/GBP trended higher in the 0.86 big figure this morning as headlines suggested that the negotiations between the government and the labour opposition didn’t yield any progress. In this process, UK PM was said to lose further support within her Conservative party. EUR/GBP came within reach of the 0.87 barrier. UK labour data were OK, largely as expected. Sterling regained some ground. This afternoon, headlines indicated that the UK PM got some more time from her party to reach a deal with labour. At the same time, several influential members openly opposed the PM’s approach. Markets apparently have little faith on a positive outcome. Sterling is again losing ground this afternoon. EUR/GBP is trading in the 0.8685 area. Cable sliding in the 1.29 big figure (currently 1.2920 area).
News Headlines:
UK labour market data printed close to expectations. Employment rose by 99k in Q1 2019, below 140k consensus. The unemployment rate unexpectedly fell from 3.9% to 3.8%, a 44-yr low, while the employment rate remained at a record high 76.1. Wages rose by 3.3% Q/Qa, in line with forecasts.
Heavyweight NY Fed governor Dudley said that central banks will be severely challenged to achieve stable economies and well-anchored inflation expectations in a world where low investment and high savings put a lid on rates and where economic growth is slow.
Reuters reports that Italian deputy PM and Lega leader Salvini is ready to break EU fiscal rules if necessary to boost employment. “Until we arrive at 5% unemployment, we will spend everything that we should and if someone in Brussels complains, that won’t be our concern”.
