Markets
Global core bonds put in another strong performance today. Disastrous EMU PMI’s personify European (and US) central bankers’ biggest growth slowdown fears. Manufacturing gauges sank to 7-yr lows, deep into contraction territory. Forward looking indicators don’t bode well for the start of Q2. The Bund started a new upleg, dipping the German 10-yr yield into negative territory for the first time since October 2016. US yields followed swiftly. The decline accelerated as the US 10-yr yield fell through the key 2.5% support area. The US 3-month/10-yr yield spread turned negative for the first time since 2007. The past cycles, this proved to be a harbinger for a coming recession. Other markets followed the risk-off trade resulting in losses on stock markets, a firmer dollar and wider peripheral bond spreads. The German yield curve bull flattens at the time of writing with yields declining 1.1 bp (2-yr) to 8.9 bps (30-yr). The US yield curve shifts 6.7 bps (2-yr) to 8.4 bps (10-yr) lower. Peripheral yield spread changes vs Germany widen by 3 bps (Spain) to 9 bps (Greece).
As was the case for most other markets, trading in the major FX cross rates was driven by the publication of the EMU March PMI’s this morning. The manufacturing PMI’s in France, Germany and the entire EMU unexpectedly printed in contraction territory. The move in the first place affected EMU assets. European equities, core yields and the euro nosedived. However, the data also fueled fears on global growth triggering a broad-based risk-off reaction. EUR/USD dropped a full big figure and filled bids in the 1.1290 area. The risk-off and the decline in global core yields also hit USD/JPY and EUR/JPY. The former declined to currently trade in the low 110 area. EUR/JPY was hit hard an tumbled from the 126+ levels to the 124.30 area. So, the EUR/USD cross rate had a roller-coaster ride as investors were pushed back and forth by both a soft Fed and weak EMU eco data. However, in a weekly perspective, the EUR/USD cross rate is trading little changed compared to where it was this time last week. So, maybe there is still some kind of balance in the relative expectations on EMU and US growth and the consequences for monetary policy of the Fed and the ECB. Both are seen as having ever more reason to take a soft wait-and-see approach.
The poor EMU PMI’s also outweighed Brexit as a driver for EUR/GBP trading today. The pair traded in in the 0.8670 area early in European dealings as investors pondered to consequences of the short Brexit delay (from 29 March to 12 April) that UK PM May received from the EU if she fails to get her deal approved in Parliament. However, the market focus turned from GBP-doubts to an outright euro sell-off after the publication of the EMU PMI’s. EUR/GBP is currently trading in the 0.8565 area. Regarding the sterling side of the story, the UK currency again showed quite resilience in the wake of yesterday’s EU summit. The UK buying some time to reconsider its Brexit options also gave sterling some comfort short-term. Cable traded with a cautious upward intraday bias. The pair is trading in the 1.3190 area.
News Headlines
Canadian headline inflation accelerated slightly to 1.5% YoY (0.7% MoM) in February vs. 1.4% last month, beating expectations. Core measures (on average) slowed marginally compared to January. January retail sales disappointed, triggering a brief loss of the loonie before recovering soon after.
EMU PMI confidence nosedived in March. With the exception of France, the services sector (52.7) in the EMU holds op fairly well but manufacturing confidence (47.6) is waning fast. More worryingly is the sharp deterioration of forward looking subcomponents. Fading business optimism, stagnating hiring intentions and depleted backlogs do not bode well for growth going forward.
