Markets:
Global core bonds are modestly losing ground today as risk sentiment remained cautiously positive. Investors are weighing the chances of a disorderly Brexit, with the UK Parliament voting on a no-deal withdrawal tonight, and if it fails on an extension tomorrow. Meanwhile, the eurozone economic slowdown is showing further signs of stabilization as the EMU industrial production rose 1.4% (MoM) in January, beating expectations (1.0%) and turning positive again after a decline of 0.9% (M/M) in December. Heavy EMU bond supply (Germany, Portugal and Italy) was well digested. The German yield curve is moving higher with changes mounting up to +1.2 bps (30-yr). US producer inflation rose for the first time in three months (M/M) but printed below expectations, while US durable goods orders rebounded in January. The US data signals some improvement of the US economy, while lower inflation readings put little pressure on the Fed to raise interest rates. The US 10-yr yield still struggles with the intermediate support (2.61%) but didn’t pick a side yet. The US yield curve is moving higher with changes varying between +0.6 bps (2-yr) and +1.3 bps (10-yr). Peripheral spreads vs. the German 10-yr yield are close to unchanged with only Greece outperforming (-7 bps) after yesterday’s strong widening.
Economic data failed to inspire (currency) markets. US PPI missed estimates by an inch but durable goods data surprised on the upside. EMU industrial production topped consensus. Markets, however, were unimpressed. Today’s price action was instead driven by sentiment and technical considerations. The (yet fragile) risk on environment bodes well for the euro. The common currency also profited from Brexit spillovers as investors assume common sense will eventually prevail (see below). At the same time, EUR/USD enjoyed some technical support after it pushed through the first intermediate resistance close to 1.13. The move lacks clear momentum however, so it remains to be seen whether the couple will hold ground. EUR/USD is currently changing hands a few ticks north of 1.13.
Sterling entered calmer waters after it got hammered yesterday following UK’s attorney general warning. He concluded that May’s revised brexit deal does not formally prevent a possible permanent customs union with the EU from happening if the backstop is triggered. Parliament unsurprisingly rejected the deal later on, setting the stage for a second vote that will take place this evening. Members of Parliament will then decide whether to leave the EU without a deal. Markets widely expect the motion to be rejected, instead betting on an extension of the deadline. The latter is subject to a parliamentary vote tomorrow if a no deal scenario is discarded this evening. The UK government lowered growth projections for this year to 1.2%, kept 2020 stable at 1.4% but beefed up 2021 and 2022 to 1.6%, adding further to a constructive sterling sentiment. The pound rises, pushing EUR/GBP back below the 0.86-mark (0.857 at the time of writing). Cable edges higher, trading close to the 1.32-handle.
News Headlines:
Headline US durable goods orders rose by 0.4% M/M in January, beating expectations. Non-military capital goods shipments excluding aircraft, a proxy for business investment in GDP, increased by 0.8% M/M (vs -0.2% M/M expected). US producer price inflation slowed for both the headline (1.9% Y/Y) and core (2.5% Y/Y) readings.
The South African central bank’s deputy governor Naidoo warned that the country has no fiscal buffer to shield against a possible crisis. The country’s rising debt trajectory will make it difficult to weather a global economic downturn. The Treasury last month forecasted that net debt will pierce through the 50% of GDP threshold in coming months.
