Markets
Global core bonds mostly lost ground today. German Bunds cautiously edged lower at EU openings ahead of the euro-area CPI release . EU equity markets were in no hurry to follow US/Asian equities higher and balanced between gains and losses. Risk sentiment deteriorated through the day. The January core CPI printed little higher than expected (1.1% vs 1.0%), while headline inflation decreased to 1.4% due to the decline in oil prices. The German yield curve is steepening with changes varying between -1.2 bps (2-yr) to +1.0 bp (30-yr). After yesterday’s rally, US Treasuries hardly moved in the run-up to the payrolls release and the US opening . The change in Nonfarm Payrolls printed way above expectations, pushing the Treasuries south. The US yield curve edged higher with gains up to +3.2 bps (5-yr). Peripheral spreads vs. the German 10-yr yield remain stable today with the exception of Italy (+16 bps) and Greece (+6bps). Italian BTP’s are falling as local news reported that the government is discussing the possible need for budget adjustments since the country is officially in a technical recession. Greece on its turn is said to fall behind on post-bailout commitments.
Swings in the EUR/USD cross rate were modest compared to the previous days. On Wednesday evening, the dollar declined on a soft Fed. Yesterday, most of Wednesday’s EUR/USD decline was reversed due to euro weakness driven by ongoing disappointing news from the EU. This morning, EUR/USD bottomed in the 1.1434/40 area and even succeeded a cautious technical rebound. EMU eco data (Final PMI’s and EMU CPI’s) were again soft, but close to expectations. In the US, the payrolls remain very strong. The report caused a very brief EUR/USD down-tick, but then move had no strong legs. EUR/USD is currently trading in the 1.1465/70 area, awaiting the ISM non-manufacturing report. We conclude from today’s price action that yesterday’s euro selling has eased. USD/JPY is gaining marginal ground and hovers in the 109 area.
Sterling fell prey to further profit taking. There was little high profile news on Brexit. However, after the votes in Parliament earlier this week, investors are still pondering the remaining chances on a Brexit delay. A lower chance for such a delay scenario is seen as (tentative) negative for sterling. EUR/GBP started a gradual intraday uptrend this morning in Europe. The EUR/GBP rebound accelerated as the UK January manufacturing PMI dropped more than expected. UK firms are building stockpiles, but production and orders are slowing. A scenario of soft growth, whatever the outcome of Brexit, gives the BoE also time to be patient on a next rate hike. EUR/GBP is trading in the high 0.86 area. Cable (1.3060 area) declines both on sterling softness and post-payrolls USD strength.
News Headlines
US payrolls showed net job growth of 304k in January, significantly beating 165k forecast and recording a best ever 100 straight month of gains. The December reading faced a big downward revision though, from 312k to 222k. The unemployment rate unexpectedly increased from 3.9% to 4%, but this was accompanied by an uptick in the participation rate from 63.1% to 63.2%, the highest since 2013. Average hourly earnings disappointed, rising only by 0.1% M/M (& 3.2%Y/Y) vs 0.3% M/M forecast.
Headline EMU inflation slowed as expected from 1.6% Y/Y to 1.4% Y/Y, but underlying core inflation picked up from 1% Y/Y to 1.1% Y/Y. Services inflation stood at 1.6% Y/Y with package holidays air fares probably playing a role. The final January EMU manufacturing PMI was confirmed at 50.5.
