Markets
Global core bonds are gaining ground today. German Bunds started a downleg at the opening bell despite a risk-off sentiment on equity markets. Bundesbank chief Weidmann said there is no acute need to adjust the ECB rate guidance, confirming yesterday’s Philip Lane. The EMU consumer confidence declines little to 106.1 in February but is showing signs of cautious bottoming out. German Bunds temporarily paired losses by noon. Core bonds fell again afterwards with no clear signal. UK gilts underperform. The German yield curve is bear steepening with yield changes up to +3.3 bps (30-yr).US Treasuries whipsawed through European trading hours but followed the final downleg in core bonds. Focus was on Fed chairman Powell’s second part of the US Congress testimonial, but given yesterday’s lack of surprise, we don’t expect any market-moving comments. The US yield curve is bear steepening with changes up to +3.5 bps (30-yr). The European Commission has warned Italy, together with Greece and Spain, over ‘excessive’ imbalances. With the Italian budget perils again resurfacing, BTP futures edged lower. Peripheral spreads are tightening, with only Italy underperforming (+5 bps).
EUR/USD maintained most of this week’s gains today. However, it is a bit unclear whether this move should be considered euro strength or USD softness. Maybe a cautious euro bid prevailed. Most sub-components of the EC business confidence didn’t deteriorated further. In line with yesterday’s assessment of ECB’s Lane, Bundesbank chief Weidmann didn’t sound that negative on prospects for the ECB to start policy normalization further down the road, despite current soft patch in the economy. Whatever the reason, EUR/USD continued to trade with reach of yesterday’s ST peak around 1.14. USD/JPY also made an interesting intraday reversal. This morning in Asia, geopolitical tensions (India-Pakistan) and an easing of recent positive risk sentiment supported the yen. During the day, the rise in European and US interest rates put the yen again in the defensive. USD/JPY is again changing hands in the 110.75 area. EUR/JPY is also trading with reach of the 126.30 ST resistance.
The sterling rebound/short-squeeze simply continued. Even as the UK parliament retained the option of leaving the EU without a deal next month, investors apparently assumed that approval of a deal or a delay are the mostly likely scenarios. With respect to the first option, Brexit hardliner Jacob Rees-Mogg was quoted to have toned down its request to resolve the Irish backstop. This headlines can be seen as an illustration of the first option. Interest rate differentials of sterling versus the euro and the dollar also widened (admittedly in a modest way) in favour of the UK currency. This evening, the UK parliament will have the chance to vote on amendments regarding the Brexit procedure, but they are unlikely to change the Brexit roadmap in a profound. EUR/GBP is currently trading in the 0.8550 area, well below the 0.8620 support. Cable regained the 1.33 big figure.
News Headlines
The European Commission identified 13 EU member states suffering from economic imbalances, according to its regular check-up. Three of them – Italy, Greece and Cyprus – face “excessive” shortfalls which require policy action. The EC is most worried by the high ratio of bad loans in their banking sectors and by their large shares of public and private debt.
While German growth is expected to be “well below” potential in 2019, one should not be “overly pessimistic” about the medium-term outlook, Bundesbank President Weidmann said today. He also believes the ECB should look through the current but temporary EMU wide weakness, dismissing the case for an adjustment to the ECB rate guidance. His comments echoed Philip Lane yesterday, who showed no willingness to alter guidance either.
Canadian headline inflation slowed to 1.4% YoY (0.1% MoM) in January as the surge in airfare prices that unexpectedly propelled December data to 2.0% YoY, was reversed. Core measures stabilized close the Bank of Canada’s 2% target at 1.9% YoY, providing the recently sidelined BoC with time to assess economic developments.
