Headlines
European stock markets opened lower, but traded with a minor upward bias, erasing those opening losses. US equities opened abound 0.25 % lower, but show no clear trend after the open.
The PCE deflator moved above the Fed’s 2% inflation target for the first time since Q1 2012. The measure rose from 1.9% Y/Y to 2.1% Y/Y, while the core PCE stabilised at an upwardly revised 1.8% Y/Y. Both figures were in line with expectations.
US consumer spending rose less than forecast in February (0.1% M/M) even as wage growth improved (0.4% M/M). The Chicago PMI increased from 57.4 to 57.7 in March, while a small decline to 56.9 was expected.
NY Fed Dudley repeated that a couple more rate hikes this year seems reasonable. He puts risks for growth and inflation on the upside because of the expected fiscal stimulus boost. Additionally, he said that balance sheet rolloffs could start late 2017.
Eurozone inflation readings disappointed in March. Both headline and core CPI rose at a much slower pace than in February and than expected. Headline CPI printed at 1.5% Y/Y (from 2% Y/Y) and core CPI at 0.7% Y/Y (from 0.9% Y/Y). The slowdown was partly related due to the timing of the Easter holiday.
German unemployment dropped by another 30,000 this month – three times better than expected and driving the country’s jobless rate to 5.8%. That’s the lowest since it became a reunified country in 1991 and down from 5.9%.
The ECB’s policy guidance, including the expected order of its next steps, remains valid for now but could change if inflation fundamentals warrant, ECB Executive Board member Coeure said.
EU leaders are preparing a tough opening stance in Brexit talks, explicitly stating that Britain must accept the bloc’s existing laws, court, and budget fees if it seeks a gradual transition out of the single market. The EU won’t agree to any future trade pact with the UK until after Britain leaves the bloc.
Spain’s minority government is expected to offer public sector pay rises and more social spending in its muchdelayed draft budget for 2017, steering further away from years of austerity as it tries to get the opposition to back the bill.
Rates
Dispersion between EMU and US inflation ignored
Global core bonds had every right to react to EMU and US inflation data, but they didn’t. EMU inflation increased at a much slower pace (1.5% Y/Y) than forecast (1.8% Y/Y) and than in February (2% Y/Y) while also core inflation slowed down (0.7% Y/Y from 0.9% Y/Y). The data were partly influenced by the timing of Easter holidays, but nevertheless fend off speculation on an early ECB exit. ECB’s Coeuré was the first board member to question the sequence of the normalisation process (tapering vs hiking), but his comments were ignored. US inflation today printed in line with expectations with the PCE deflator rising above the Fed’s 2% inflation goal for the first time since Q1 2012. It turned out to be a dull pre-weekend session until NY Fed Dudley hit the wires for a second day running. He echoed comments by Cleveland Fed Mester yesterday, saying that the Fed could start letting its balance sheet run-off late 2017. One could expect a bear steepening on such quotes, but instead the US curve bull steepened (5yr to 30yr) as Dudley added that normalizing the balance sheet is a substitute for rate hikes. US Treasuries ticked slightly higher after his comments.
At the time of writing, changes on the German yield curve range between +0.2 bps (2-yr) and -1.4 bps (5-yr). Changes on the US yield curve vary between +0.3 bps (30-yr) and -3 bps (5-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany range between -1 bp and +3 bps. The 16 bps Italian spread widening is due to a BB benchmark change.
Currencies
EUR/USD stabilizes near week low
EUR/USD entered calmer waters today even as the EMU inflation slowed much more than expected. The news was apparently discounted. EUR/USD hovered in a tight range in in the high1.06 area. USD/JPY failed to sustain yesterday’s rebound and the rise in core yields and the equity rally did ran into resistance.
Overnight, Asian equities traded mixed with Japan and China initially outperforming. However, the daily momentum faltered as the session proceeded. Japanese eco data were mixed with the headline February CPI slightly higher than expected at 0.3% Y/Y. USD/JPY tried to regain the 112 barrier, but the pair already traded back below the big figure at the start of the European session. So, the impact of yesterday’s hawkish comments from Fed Dudley on USD/JPY was far from spectacular. EUR/USD hovered near yesterday’s lows (1.0675 area).
The EMU eco data were interesting with the German unemployment rate declining to a record low of 5.8%. This good news was balanced by EMU inflation slowing sharply from 2.0% Y/Y in February to 1.5% Y/Y in March. Core inflation also eased to a low 0.7% Y/Y. The reaction of European interest rate markets and of the euro was very limited. The news was already discounted after yesterday’s German data. EUR/USD hovered in a tight range near the 1.0675 pivot.
US data also didn’t help to inspire any end-of-week/quarter activity. The personal income and spending data were almost exactly in line with expectations (including the close watched PCE deflators). USD/JPY trades currently is the 111.70 area. EUR/USD is holding in the 1.0675 area.
Sterling taking a breather
Today’s UK eco data were interesting but hardly impacted sterling trading. The final UK Q4 GDP printed at 0.7% Q/Q and 1.9% Y/Y. However, details suggested a softening in consumer spending even as the savings ratio declined. On the other hand, net exports made a substantial positive contribution to growth. This was illustrated by a bigger than expected decline in the UK current account deficit. Looking forward, the questions is whether exports (supported by a weaker sterling) will continue to compensate for a slowdown in domestic spending as the Brexitprocedure continues. In a guideline for the Brexit-negotiations, EU Tusk indicated that enough progress has to be made on issues regarding the separation process before talks on future trade relations can start. The eco data were mixed for markets/sterling. The EU-approach is not the start the UK wants, but is no surprise. At least for now, sterling holds strong. EUR/GBP hovers near the recent lows (currently 0.8560 area), but this also still partially euro softness. Cable hovered mostly in the higher half of the 1.24/lower 1.25 big figure. Tentative signs of GBP consolidation?
