Markets
Global core bonds gain ground today with US Treasuries outperforming German Bunds. Sentiment proved fragile today as political event risks have put investors in wait-and-see modus. Core bonds opened neutral with a modest upward tendency. Italian production data fell harder than expected in December. Italian bonds fell on the news while German Bunds moved higher. ECB vice-president Luis de Guindos confirmed the dovish turn of the ECB recently but said the bank is in no rush to change course. The German/EMU ZEW expectations gauge printed mixed, but market reaction was muted. The German yield curve is little changed with changes varying between -0.3 bps (2-yr) and +0.1 bp (5-yr). US Treasuries tread water today but jumped higher when US investors joined trading. With only housing sentiment to be released, sentiment will steer trading today. US equities opened lower but with an upward tendency, reversing the upward move of US Treasuries. The US yield curve moves lower with changes in the range of 1.5 bps (30-yr) to -2.4 bps (5-yr). Peripheral spreads over the German 10-yr yield are steady with only Italy underperforming (+6 bps).
Headlines were tentatively euro negative, but the reaction of the single currency was only of intraday significance. Italian production and orders missed consensus again by a wide margin. The report blocked a wary intraday attempt of EUR/USD to move away from the 1.13-area. ZEW German investors sentiment printed below consensus but the expectations component improved for the 4th month in a row. The release had little impact on the euro. Around noon, the EUR/USD pair dropped (temporarily) below the 1.13 handle on ‘soft’ comments from ECB’s de Guindos. However, the move had no strong legs. The simple confirmation that the euro zone is in a soft spot and the ECB is pondering the consequences for its policy, at least today, wasn’t enough for euro ‘shorts’ to add to their positions. With few important eco data in the US, EUR/USD is currently trading in the 1.1310 area. The yen initially declined as BoJ’s Kuroda warned that the BOJ can still take measures to prevent unwarranted yen strength. However, the USD/PY reversed gains from Asia and Europe as the dollar lost ground early in US dealings (currently 110.60 area).
Sterling traded with a positive bias today. EUR/GBP hovered in the 0.87 area going into the publication of the monthly labour data. The labour market report was solid (cf infra). The reaction of sterling immediately after the release was limited, but the UK currency gained traction later. UK policy makers continued to stress the significance of upcoming meetings with EU officials. At the same time, there are few indications that the EU is prepared to make substantial concession on the issue of the ‘Irish backstop’. Still the UK currency extended gains. EUR/GBP is trading in the 0.8725 area. Cable is making good progress in the 1.29 big figure.
News Headlines
The Swedish Riksbank’s preferred inflation gauge, which is calculated using fixed mortgage interest rates, unexpectedly slowed to 2% Y/Y in January (-1% M/M). Markets expected CPIF to clock at 2.3% Y/Y while the central bank even expected 2.4% Y/Y. The Swedish crown lost ground after the release as investors put in doubt the Riksbank’s H2 2019 rate hike intentions. EUR/SEK rose to 10.6, the highest level since last August.
The UK labour market remains hot. The unemployment rate stabilized at 4% in Q4 2018, the lowest level since 1975. Average hourly earnings rose by 3.4% in the same period, matching the fastest pace in 9 years and strengthening UK households’ disposable income. The economy added 167k jobs, pushing the employment rate to a record 75.8%. Productivity declined though, with output per hour worked down 0.2% in Q4 2018.
Polish employment rose by 2.2% M/M and 2.9% Y/Y in January, beating consensus and providing evidence of a strong labour market. Average gross wages declined by 6.5% on a monthly basis (end of year effect), but rose 7.5% on a yearly level. These strong data probably won’t cause a change of heart at the dovish central bank who sticks with her view of unchanged policy in 2019 and 2020. The Polish zloty couldn’t profit.
