Headlines
European equity markets corrected lower today with the telecom sector underperforming. US stock markets opened around 0.25% in the red.
NY Fed Dudley said that the Fed will probably begin shrinking its balance sheet sometime later this year or in 2018 if economy stays on track. They will allow both MBS and Treasuries to run off. He added that there’s no great urgency for the Fed to tighten aggressively though.
The BoE kept its policy unchanged with one member again voting in favour of an immediate rate hike. The BoE suggested interest rates could rise towards more normal levels over the next three years if Brexit negotiations go smoothly, but said it had been overoptimistic about economic performance for the first half of this year.
US shale oil output is growing at a faster than expected rate, keeping pressure on prices despite steep supply curbs from some of the world’s biggest producers, Opec said in its monthly market report.
The European Commission revised upward its forecasts of euro zone economic growth this year and projected a lower unemployment rate, in new signs that the bloc’s recovery is gathering pace. The 19-country currency bloc is expected to expand by 1.7% this year and 1.8% in 2018.
Banks’ "unconstrained" ability to generate credit by pledging the same assets as collateral multiple times needs to be curbed or risks creating a new financial bubble, ECB vice president Constancio said. His remarks underscored the ECB’s concerns about the prospect of a new boom in lending between financial firms
British industrial output shrank for a third month in a row in March (-0.5% M/M) underscoring how the impact of last year’s Brexit vote has begun to weigh on the economy. The ONS also said Britain’s trade deficit widened by more than expected, a further setback for hopes that sterling’s fall would help rebalance the economy.
US weekly jobless claims stabilized around historical lows (236k) while markets expected a small setback to 245k. Continuing claims declined to a 28-yr low at 1918k. The bigger-than-forecast rebound in April producer prices indicates inflation pressures continue to build in the US economy and that March’s decline was short-lived.
Rates
US Note future tests this week’s low after strong data
Global core bonds continued to trade choppy. The Bund faced immediate selling pressure, but equity weakness came to the rescue and prevented losses. The EC only marginally upgraded its 2017 growth forecast, while keeping it unchanged in 2018 which avoid more ECB exit speculation. Heavyweight NY Fed governor Dudley suggested that the Fed will allow both MBS and US Treasuries to run-off, starting at the end of this year or the beginning of next. He added that there’s no hurry to tighten policy though. His comments fell on deaf ears. US eco data, even if they were second-tier, managed to change the intraday tide. Weekly jobless claims remained near historically low levels while producer prices rose faster than forecast. US Treasuries recorded new intraday lows while German Bunds lost ground as well. Brent crude managed to hold above the key $50/barrel mark.
At the time of writing, the German yield curve bear steepens with yield 1 bp (2- yr) to 3.1 bps (30-yr) higher. Changes on the US yield curve range between +0.3 bps (10-yr) and +1.3 bps (30-yr). On intra-EMU bond markets, 10-yr yield spreads changes versus Germany range between -1 bps and +2 bps with Portugal (-3 bps) and Greece (-5 bps) outperforming.
The Italian debt agency tapped the on the run 3-yr BTP (€2.44B 0.35% Jun2020), 7-yr BTP (€2.25B 1.85% May2024), 30-yr BTP (€1.25B 2.7% Mar2047) and the off the run BTP (€1.25B 4.75% Sep2044). The combined amount sold (€7.19B) was near the upper end of the €5.5-7.25B target range. The auction bid cover was 1.51 which is rather strong for Italian standards. Tonight, the Treasury ends its refinancing operation with a $15B 30-yr Bond auction. Currently, the WI trades around 3.05%.
Currencies
Dollar maintains most of recent gains ahead of key data
Today, EUR/USD and USD/JPY initially drifted sideways. Both cross rates lost ground as equities finally fell prey to modest profit taking. The US eco data (PPI and claims) were better than expected. Core yields rose slightly, but were not able to trigger more USD gains. The focus for USD trading is on tomorrow’s US CPI and retail sales. EUR/USD trades in the 1.0855/60 area. USD/JPY struggles not to fall below 114.
Overnight, most Asian equity indices gained ground with the Nikkei and the Korean indices at multi-month highs. Mainland China equities initially underperformed but staged a remarkable rebound towards the close. Until now the Chinese underperformance had little impact on other markets, but the issue deserves close monitory. USD/JPY (114.20) remained in risk-on modus, holding within reach of the recent highs. EUR/USD stabilized the 1.0865 area.
Early in Europe, there was again no clear directional momentum in European equities nor in EUR/USD and USD/JPY. The EU commission forecasts were revised only marginally higher and no market mover. At the onset of the US trading session, sentiment on risk gradually faltered. The correction weighed on EUR/JPY, EUR/USD and, to a lesser extent USD/JPY. The US PPI and jobless claims were stronger than expected and triggered some modest gains of the dollar against the euro. EUR/USD trades currently in the 1.0850/60 area. So, the price action in the cross rate was both due a pinch of risk-off and a small piece of USD strength. The US eco data also help to prevent a further USD/JPY decline. The pair stabilizes near 114. However, some further topping out might be on the cards if sentiment on risk would worsen more on China or for whatever other reason including simple profit taking.
Sterling ceding ground post-BoE decision.
Today, UK March production data and the trade balance were substantially weaker than expected. Sterling lost temporary ground upon their publication, but EUR/GBP drifted back to the low 0.84 area going into the BoE policy decision and inflation report. The Bank of England kept a balanced approach as it said that ‘Monetary policy cannot prevent either the necessary real adjustment as the United Kingdom moves towards its new international trading arrangements or the weaker real income growth that is likely to accompany that adjustment over the next few years’. The Bank indicated that an earlier rate hike might be needed in case of a smooth Brexit,. However, what are the chances for this scenario? The moves in sterling remained modest, but the market apparently concluded that the BoE will give slightly more weight to supporting growth rather than fighting inflation. The vote was again 7-1 for an unchanged decision. There was no additional support for a rate hike, what some apparently expected. EUR/GBP trades currently in the 0.8445/50 area. Cable is drifting further away from the 1.30 resistance and trades currently in the 1.2860 area.
