Markets
Global core bonds were mixed today. European markets followed the US example of yesterday after the Fed’s policy meeting. Equities edged lower and core bonds opened higher. Investors were not satisfied by the Fed’s ‘dovish hike’, a 25 bps rate hike but a lower 2019 rate forecast (2 hikes instead of 3), and had hoped for a much softer tone. European equities fell at opening, pushing German Bunds higher. The move came to a halt as the reaction to the Fed faded a little, with German bunds pair their gains completely during a volatile trading session. US Treasuries were steady today with some appetite to move lower. The Philadelphia Fed Business Outlook fell from 12.9 in November to 9.4 in December, the lowest level since the end of 2016, with a lot of the weakness driven by a drop in inventories and shipments. The disappointing gauge adds up to worries of a fading economic momentum. It pushed risk sentiment back south and UST’s back up. The Jobless Claims remained stable and didn’t surprise. US equities opened in red as well. The US yield curve was mixed, with changes ranging between -1.2 bps (30-yr) to +1.5 bps (5-yr). The German yield curve flattened with changes varying between -3.2 bps to +0.4 bps (2-yr).
EUR/USD explored higher grounds despite today’s outright risk-off climate. Dollar gains in the wake of yesterday’s dovish hike evaporated as markets try to assess the Fed’s policy implications going forward. The Philly Fed business outlook disappointed (9.4 vs. 15.0 expected) but had little impact on trading. EUR/USD headed north swiftly during early European dealings but lost momentum around noon. The pair is trading around 1.1444 at the time of writing. The 1.12/15-range remains intact for now. Markets will scrutinize tomorrow’s US data batch (CPI, durable goods) but it remains to be seen whether this can alter the technical picture if even the Fed couldn’t. USD/JPY extends its move south at sessions lows close to 111.5.
EUR/GBP followed its American counterpart in lockstep, defying stronger than expected UK retail sales. Headline sales rose 1.4% MoM (3.6% YoY) vs. 0.3% MoM (2.0% YoY) expected. Core measures showed a 1.2% monthly increase (3.8% YoY) whereas markets expected a mere 0.2% (2.3%) increase. Attention then shifted to the BoE policy meeting, which – as expected – left interest rates unchanged at 0.75%. But the BoE warned that brexit uncertainties have “intensified considerably” and have weighed on the near-term outlook for UK growth. It expects 2018Q4 en 2019Q1 growth to land at a modest 0.2% with risks tilted to the downside. Inflation is expected to slow below the 2% target in January (oil price related) but improved labour market conditions are likely to exert sustainable upward pressure on prices eventually. To keep contain future inflation, the BoE still assumes a quarter point rate hike once a year under the condition of a smooth Brexit. In any case, the bank reiterated, the policy response to Brexit could be in both directions, “whatever form it takes”. Sterling was little changed following the decision/assessment and is trading near session highs. EUR/GBP is changing hands close to 0.904. Cable is filling bids around 1.267.
News Headlines
The Swedish Riksbank raised its policy rate for the first time in 8 years, from -0.5% to -0.25% while simultaneously downgrading growth/inflation/rate forecasts. A classic “dovish hike” in which the central bank plots 1 more interest rate increase next year, followed by 2 hikes/year pace afterwards. EUR/SEK nevertheless lost some ground as the market was split on this month’s vote. EUR/SEK fell to the 10.25 area
Bloomberg reports that OPEC and its allies will give greater clarity on their strategy to stabilize oil markets tomorrow by publishing a list of production cuts agreed by each country. It couldn’t stem the rod on oil markets with Brent crude dipping temporarily below $55/barrel for the first time since September last year.
