Markets
Global core bonds are losing ground today with US Treasuries underperforming German Bunds. The preliminary deal in the US on border security funding and positive signals from the US-Sino trade talks lifted sentiment across the US and Asia, but lost some magnitude in European trading. Industrial production for the EMU fell 0.9% (M/M) in December, more than the expected 0.4% drop. German Bunds moved higher throughout the day while US Treasuries were little changed. US CPI and earnings data surprised on the upside, sending US Treasuries (and German Bunds in its wake) south. The German yield curve is bear flattening with changes up to +0.9 bps (2-yr). The US yield curve edges higher too with changes in the range of +1.4 bps (30-yr) to +3.5 bps (5-yr). The Spanish parliament rejected the ruling Socialist party’s 2019 budget proposal, significantly increasing the chances that PM Sanchez will call a snap election. The widening of the Spanish spread over the German 10-yr yield remains limited. Any politically-related spread widening might remain small as the chances of an Italian-like, more Eurosceptic, outcome is unlikely. Italian BTP’s advanced on a successful 2025 bond sale. Peripheral spreads over the German 10-yr yield are stable with only Italy (-5 bps) and Spain (-4 bps) outperforming.
Yesterday’s euro-short squeeze/dollar correction already halted today. The topside in EUR/USD was capped near yesterday’s intraday peak (1.1340 area). EMU December production data were weak, but that shouldn’t be a surprise anymore. Evidently, it also didn’t help the euro. The US CPI printed marginally higher than expected. Markets also picked up the signal of higher January real US earnings. US yields and the dollar jumped higher. EUR/USD dropped again below the 1.13 handle, reversing a big part of yesterday’s rebound. USD/JPY also resumed its uptrend and is currently trading in the 110.80 area. So, for now the dollar-friendly environment persists.
GBP trading was mostly technical in nature and order driven. EUR/GBP drifted higher into the UK inflation release. Most price indicators, including headline CPI (1.8%), printed slightly softer than expected but deviations from consensus were limited. EUR/GBP tested the 0.8790 area around the time of the release, but with no follow-through losses for sterling. The data apparently weren’t enough to question recent ‘positive’ BoE communication. Later, Brexit-noise came back on the radar. According to headlines/rumours the UK government might consider a last minute Brexit-delay in case the risk of a no-deal Brexit was likely to materialize. It is all rumours and speculation, but maybe the perceived higher chance of a delay was slightly GBP-supportive. EUR/GBP trades currently again in the 0.8760 area. Cable (1.2890 area) is little changed on a daily basis, but this is partially due to the USD-rebound.
News Headlines
The Swedish central bank kept its policy rate unchanged at -0.25%. The Riksbank doesn’t take a dovish turn like other global policy makers amid marginal downgrades to the economic forecasts. The domestic economy is expected to remain firm for the next years with inflation evolving to the 2% inflation target. The Rikbank still envisages a Q4 2019 rate hike. The mandate for intervening in the FX market was not extended. EUR/SEK fell from 10.5 to 10.4.
The Spanish parliament voted the ruling Socialist party’s budget proposal down. The plan was rejected by 191 votes in the 350-seat parliament. Socialist PM Sanchez’ minority government is now under heightened pressure to call snap elections. El Pais reports that the government will announce its plans on Friday.
January US headline inflation was flat for a third month in a row. Core inflation rose by 0.2% M/M as expected. Energy prices (-3.1% M/M) dragged headline CPI lower. On a yearly basis, they respectively printed at 1.6% Y/Y and 2.2% Y/Y. US real average weekly earnings accelerated to 1.9% Y/Y, the fastest pace since October 2015.
