Markets:
Global core bond trading was subdued today ahead of tonight’s FOMC meeting. Both the German and US yield curves flattened, anticipating the next steps in the normalization/tightening cycle of the ECB and the Fed. Changes on the US yield curve ranged between +0.8 bps (2-yr) and -0.6 bps (30-yr). German yield changes vary between +0.2 bps (2-yr) and -1.7 bps (30-yr). Intraday trading was erratic. Disappointing EMU industrial production data were expected following weak national prints earlier this/last week. US Treasuries made another shy attempt to move lower on higher than expected PPI data. The headline reading rose by 3.1% Y/Y in May, the fastest pace since the end of the 2011. The core measure accelerated to 2.4% Y/Y. Most investors remain side-lined though ahead of the Fed. Many uncertainties remain even if a 25 bps rate hike to1.75%-2% is discounted. Changes to the Fed’s communication strategy are possible. Will the Fed still label current policy as accommodative or do we enter “neutral” conditions? If so, will “neutral” be interpreted as dovish (time to slow tightening cycle) or hawkish (time to get from neutral to restrictive)? The Fed also ponders the possibility to do a press conference after every meeting. New growth, CPI and unemployment forecasts will be monitored as well. The list of variables to monitor is long which could make any market impact less outspoken with several items cancelling each other out. We hold our long term negative view on US Treasuries. Any gains of the US Note future in case of a dovish interpreted message might prove to be short-lived.
USD. As could have been expected, FX investors were mostly side-lined ahead of this evening’s Fed policy decision. The dollar was rather well bid overnight in Asia, but couldn’t maintain its positive momentum. EUR/USD settled in a rather tight range in the mid 1.17 area. The US currency even lost a few ticks early in US dealings. USD/JPY showed a similar picture. The pair set an intraday top near 110.70 but is also losing a few ticks. We expect a rather hawkish assessment (dots indicating two additional rate hikes in 2018). This might be USD supportive short-term. Especially USD/JPY might profit. The picture for EUR/USD is more diffuse as the ECB is also expected to signal a less easy policy tomorrow. We expect any EUR/USD decline to remain modest. In a MT perspective, we maintain the view that a further decline of EUR/USD below the 1.1510 support won’t be easy.
GBP. Today, sterling still showed a weak momentum. Yesterday, UK PM May avoided a defeat in a vote on amendments to the ‘Brexit withdrawal bill’. However, any positive impact on sterling was short-lived as the division within PM May’s Conservative Party isn’t solved at all. Tensions will probably resurface in coming weeks, maybe even in coming days. Today, UK May CPI data were close to expectations (2.4% Y/Y headline; 2.1% Y/Y core) but remained soft. The BoE shouldn’t feel pressured to raise rates anytime soon. The UK currency was already captured in a gradual intraday down-move ahead of the inflation data and lost a few more ticks afterwards. EUR/GBP is changing hands in the 0.8820 area. The ST range top of 0.8843 is again within reach. Early softness in cable was modestly reversed this afternoon as the USD lost slightly ground across the board (currently 1.3345 area).
News Headlines:
PM Theresa May has confirmed it was forced yesterday into promising a major concession to pro-EU lawmakers which could give parliament a greater say over the exit deal Britain negotiates with the EU. Today, Ian Blackford (leader of the Scottish National Party) was thrown out of the chamber by the Commons speaker. He refused to sit down while demanding a new debate on Scotland’s input for brexit negotiations.
Italy’s new finance minister, Giovanni Tria, has cancelled a trip to Paris to meet his French counterpart, Bruno Le Maire, as the diplomatic dispute concerning immigration policy escalated.
Factory output decreased by 0.9% in the euro zone in April from March, which was more than the expected decrease of 0.7%. These weak output numbers confirm other indicators that the economy in the euro zone is slowing. It also shows the difficult decision that has to be taken by ECB this Thursday on how to exit the APP.
