Markets
Today, the swings in core US and German bond yields were moderate. Both EMU and US (core PCE) inflation data were close to expectations and had no decisive impact on intraday yields’ trends. The US yield curve bear flattens slightly with 2 & 5 year yields rising 1.5bp while the 30-y yield trades little changed. German bunds slightly outperform with the very long end also outperforming (30-y -2.9 bp). During the morning session, the bund showed a more volatile trading pattern. The moves were probably linked a Reuters article. The article suggested that the ECB is considering buying more long-dated bonds when reinvesting maturing bonds from the APP purchases. It could help to keep a potential rise in LT European yields in check. The article also suggested that ECB, to some extent, could deviate from the capital key when reinvesting in bonds. The bund initially declined after the quotes, but soon reversed the initial losses. The Bund future contract trades little changed (162.50 area). Intra-EMU spreads versus Germany narrowed up to 8 bp with Italy (-6 bp) and Greece (-8 bp) outperforming.
After the EUR/USD short squeeze following the EU-summit migration deal, the pair lost a few ticks before hovering back to its intraday-top (around 1.1660/65 area). The improved in global risk sentiment caps the rise of the dollar against the likes of the euro. The trade-weighted dollar is drifting further south of the important technical 95-barrier, possibly suggesting some easing EM-tensions. USD/JPY remains the exception to the rule. The pair is set for a 4-day winning streak as a moderate risk-on weighs on the yen. EMU inflation matched estimates of 1.0% YoY core inflation and 2.0% YoY headline inflation and had little impact on euro trading. Core PCE inflation in the US came in at an expected 0.2% MoM but was slightly higher than anticipated on a yearly basis (2.0% YoY vs. 1.9% expected). The impact on the dollar was very limited.
Initially, sterling lost further ground against a stronger euro. However, the pound soon pared losses after the ONS increased Q1 growth from 0.1% QoQ to 0.2% QoQ, suggesting the growth slowdown in the first quarter was not as sharp as feared. Chances for an august rate hike rose, and so did sterling. However, EUR/GBP gained back a few ticks, possibly the result of some EU Brexit negotiator Barnier squawking. The pair is currently trading 0.8850 area. So, the jury is still out whether the break of the 0.87/0.8850 consolidation pattern will be confirmed. Cable profited from the EUR/USD short squeeze in the early trading hours and enjoyed a second boost from the GDP upgrade. The pair is currently changing hands at around 1.3150.
News Headlines
At the European Council top in Brussels, Michel Barnier, EU Brexit negotiator, warned that “huge and serious” differences still had to be overcome. He also said the EU would not accept any move to keep Britain in the single market for the goods sector only. Meanwhile, rating agency Moody’s sees the UK-EU negotiations momentum waning, suggesting Brexit uncertainty could “persist for longer than anticipated”.
Larry Kudlow “hopes the Fed understands” that faster economic growth and rising employment don’t cause inflation. Instead, Trump’s pro-business measures have expanded the economy’s potential to grow, according to the president’s top economic adviser.
