Markets:
Global core bonds are trading mixed today with US Treasuries outperforming German Bunds. Risk sentiment opened with a downward bias, tracking losses in Asia. The German Bund initially jumped higher but reversed the trend on comments of Philip Lane. The ECB’s chief economist to be said the current ECB policy strategy can cope with the current downturn in economic momentum. His comments downplay a policy adjustment (and introduction of a fresh TLTRO) at the ECB March meeting, indicating a rate hike remains possible after the Summer. The German yield curve edged higher with changes up to +2.2 bps (2-yr). Fed governor Powell testifying before the US Senate Banking Panel was the talk of the day but his statement didn’t surprise. He said the “crosscurrents and conflicting signals” that the healthy US economy is facing, warrant a patient approach to future interest-rate changes, but repeats the Fed is ready to adjust balance-sheet normalization if needed. US Treasuries paired some of their gains and moved south. The US yield curve is edging lower with changes varying between -0.8 bps (30-yr) to -1.9 bps (5-yr). The 15-year Spanish bond syndication attracted large bids, confirming strong demand for peripheral debt. Peripheral spreads over the German 10-yr yield are tightening with Italy (-7 bps), Greece (-7 bps) and Portugal (-5 bps) outperforming.
USD trading mainly developed in a wait-and-see modus as markets awaited the testimony of Fed’s Powell before the Senate. On the euro side of the story, recent cautious EUR/USD bias was supported by comments from ECB’s Lane, as he indicated that ECB might only make limited downward revisions to its forecasts at the March meeting. EUR/USD retested the 1.1370 area, but a real break didn’t occur. Early in US dealings, the dollar was sold on poor US housing starts. EUR/USD set a minor correction top beyond 1.1370. USD/JPY dropped to the 110.70 area. Still, investors were reluctant to sell the dollar ahead of Powell’s testimony. Powell held a cautiously positive tone on the economy allowing the Fed to be patient. Little news compared to recent communication. The USD reaction was close to non-existent, but the dollar profited slightly from stronger than expected mid-morning US confidence data. EUR/USD is trading in the 1.1350 area. USD/JPY regains a few ticks and is again trading in the 110.80 area.
The sterling rally reaccelerated this morning. At that time, it was still difficult to predict the twists in the Brexit drama. However, markets assumed that chances for a ‘no-deal Brexit’ were declining in the most likely scenarios. EUR/GBP filled bids below 0.86. Cable jumped north of 1.32. In a new appearance before Parliament, UK PM May clarified the Brexit-roadmap. She still seeks approval for a Brexit deal in a vote on March12. If the deal receives no majority, Parliament will have to vote on a no-deal Brexit. If both options are rejected, a vote on a ‘limited’ delay will be held on March 14. The sterling rally stalled after PM May’s appearance in Parliament. MPs will have a chance to vote on a delay, but the option of a no deal Brexit isn’t formally ruled out as well. EUR/GBP is again trading in the 0.8625 area. Cable returned below the 1.32 handle. That said, sterling de facto preserved most of its recent gains.
News Headlines:
Philp Lane, ECB’s chief economist to be, said that the current ECB’s monetary policy strategy can handle with minor downward revisions to the GDP path at the March meeting. His comments suggest no willingness to extend the current forward guidance on interest rates which states “at least unchanged until the Summer of 2019”.
The Hungarian central bank kept its monetary policy unchanged. The NBH nevertheless stays on track for a near start of policy normalization as the probability of core inflation rising above the 3% inflation target has increased. Tightening will begin with unwinding of unconventional measures.
US housing data disappointed in December. The most eye-popping release was an unexpected 11.2% (M/M) decline in housing starts. One upbeat detail were 187k homes which were authorized, but not yet started in December. The February consumer confidence (131.4 from 121.7) and Richmond Fed Manufacturing (16 from –2) indices rebounded much more than forecast in February.
