Headlines
European equities initially slid lower, but the losses were easily recouped after which sideways trading followed. US stock markets opened little changed.
The euro zone defied expectations of slowing growth in April, expanding for another month, according to Markit PMI business sentiment. Its closely-watched measure of economic activity climbed to a fresh post-euro zone crisis high of 56.7 in April from 56.4, beating forecasts, to hit its highest level since April 2011.
UK retail sales fell back more than predicted in March to cap off the first quarterly decline since 2013 in the latest sign that rising inflation is beginning to weigh on economic growth. Retail sales excluding auto fuel fell by 1.5% compared to February, bringing the year on year growth rate down to 2.6%, from 4.1% the previous month.
BOE policy maker Michael Saunders sees risks that the weaker pound will boost near-term inflation more than officials projected in February. "I would not be surprised if CPI inflation reaches 3% later this year or early next".
Federal Reserve staff, widening their outreach to investors in anticipation of a critical turning point in monetary policy, are seeking bond fund manager feedback on how the central bank should tailor and communicate its exit from record holdings of Treasuries and mortgage-backed securities.
Belgium’s 2016 budget deficit widens to EU11.1b, or 2.6% of GDP, from EU10.3b, or 2.5% of GDP in 2015. Gross public debt rises to EU446.8b, or 105.9% of GDP, from EU434.8b, or 106.0% of GDP in 2015. EU Commission anticipated a 2016 deficit of 2.9% of GDP, debt-to-GDP ratio of 106.8% at year-end for Belgium
Rates
Core bonds take day off ahead of French election
Core bonds showed no appetite to choose direction today and stayed near yesterday’s closing levels. The April EMU PMI rose unexpectedly for the sixth consecutive month to a 6 year high, suggesting that the strong economic momentum isn’t hindered by political uncertainty. Even the Italian economy is gaining momentum, as evidenced by iron-strong industrial sales and orders figures. For the bond markets, it was worth one long yawn. Some punters anticipated a continuation of the past two days selling spree at the start of the Bund trading. They tried to push the Bund lower, but once equities opened, the losses were recouped. Traders understood that it would be a wait-and-see session ahead of the French election. The Bund sleep-walked around in a 20 ticks range. US traders had even less appetite than their European peers and Treasuries remained range-bound too as the US market calendar was unenticing.
At the time of writing, the German yield curve bull steepens marginally with yields 0.7 bps (2-yr) to 0.1 bp (30-yr) lower. Changes on the US yield curve ranged between -0.4 bps (2-yr) and +0.4 bps (30-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany narrowed up to 4 bps for France. Core spreads widened 1 bp.
Currencies
No further euro gains ahead of French election
Yesterday’s pro-Europe/France repositioning didn’t continue. EUR/USD and USD/JPY held tight ranges respectively in the 1.07 and the 109 area. Investors kept a wait-and-see modus going into the first round of the French presidential election. The EMU PMI was strong, but had also no impact on the euro.
This morning, Asian markets to some extent joined the risk rally from the US yesterday evening. However, contrary to what happened yesterday, the move had no big impact on the dollar. EUR/USD stabilised in the low 1.07 area. USD/JPY traded near the 109.25 level.
At the start in Europe, investors retried yesterday’s tactics. Both EUR/USD and USD/JPY gained a few ticks. The move had no strong legs and all the gains evaporated very soon. The EMU PMI’s (in particular the French ones) were strong, indicating ongoing good growth in EMU at the start of the second quarter. However, it didn’t help a resumption of yesterday’s risk-on trade. On the contrary, the topside of European equities was blocked and core bond yields stabilized. Both EUR/USD and USD/JPY lost a few ticks, returning to the 1.07 and 109 big figures. Yesterday’s terrorist attack in Paris maybe made investors a bit reluctant to adopt positions further to a market-friendly outcome of Sunday’s vote in the first round. The was no additional news this afternoon in the US to spice USD trading., leaving EUR/USD and USD/JPY in directionless trading.
Poor UK retail sales have limited impact on sterling
UK investors focused on the retail sales today. Of late, there were tentative signs that price rises were eroding consumers’ purchasing power and that this would affect spending. UK March retail sales declined more than expected -1.8% M/M). A more modest decline of -0.5M/M after a strong February report was expected. The damage for sterling was limited. Cable was well bid going into the publication of the report (intraday top of 1.2835) but returned to the big figure after the report. EUR/GBP jumped up and down in the 0.8375 area as sterling’s ‘decline’ was counterbalanced by a decline of EUR/USD more or less at the same time. So, for now, soft UK data still have only a modest impact on sterling. Later in the session, there were some hawkish comments from BoE ‘s Saunders as he indicated that the BoE doesn’t need to delay a rate hike because of Brexit if growth and inflation are stronger than expected. The reaction of sterling was again close to non-existent. EUR/GBP trades currently in the 0.8365/70 area. Cable hovers around 1.28.
