Markets
Global core bonds are mixed today with US Treasuries underperforming German Bunds. As EU markets were closed yesterday, German Bunds jumped (modestly) lower overnight in a catch-up move following modest losses in US Treasuries, as the Fed sounded less dovish than expected at yesterday’s policy meeting. Asian equities performed mixed, but European bourses tracked late WS weakness and opened with losses. German Bunds recovered from opening losses, cautiously moving higher throughout the day. The German yield curve is moving little lower with losses not bigger than -0.5 bps (10-yr). US Treasuries stabilized from yesterday’s air pocket, but initially held on to a downward bias. Part of intraday losses were paired ahead of the US eco data. Weekly jobless claims printed little below expectations but stable from last week and had little impact on trading, while the Q1 nonfarm productivity measure outperformed expectations. At the time of writing, the US yield curve is edging higher with changes in the range of +1.6 bps (30-yr) to +2.2 bps (2-yr). Peripheral spreads over the German 10-yr yield are tightening with Spain (-3 bps) outperforming as it profits from a stronger-than-expected April Manufacturing PMI (51.8 vs. 50.9 in March).
EUR/USD settled in a tight sideways range today near the 1.12 big figure. Dollar yesterday regained modest ground as Fed Chair Powell maintained neutral guidance on future policy even as inflation drifted below the 2% target of late. Today, eco data (in EMU and the US) mostly were second tier and provided no clear guidance for euro nor USD trading. Investors are looking forward to tomorrow’s US payrolls report and non-manufacturing ISM before engaging in new directional USD positions. EUR/USD currently trades in the 1.1185 area. USD/JPY is changing hands in the 111.50 area.
The focus for sterling trading shifted today, at least temporary, from Brexit to monetary policy as the BoE announced its policy decision and published a new quarterly inflation report. Evidently, the BoE assessment on growth and inflation remains highly conditional on the outcome of Brexit. Q1 growth is estimated at a strong 0.5% Q/Q. However, part of this growth is due to inventory build-up related to Brexit and will probably be reversed in the second quarter. Even so, the BoE indicated that underlying growth is probably a little stronger than what was anticipated in the February inflation report. As demand growth is expected to exceed supply growth, the BoE expects that it will have to raise rates more than what is discounted in current market curve to bring inflation back to 2% at the end of the policy horizon. However, any monetary tightening will take place at a gradual pace and to a limited extend. In theory, this assessment could have been sterling supportive as most other major central banks have a neutral or even an easing bias on monetary policy. However, the fact that the MPC voted unanimously to leave the policy rate unchanged suggests that sterling won’t get any interest rate supported in the near future. EUR/GBP showed no clear trend and hovered in the high 0.85 area. Cable is going nowhere in the mid 1.30 area..
News Headlines
The Czech National Bank increased rates from 1.75% to 2% today as the Czech currency is persistently trading weaker than the bank’s own projections and inflation is running further away from its 2% target (3% in March). Governor Rusnok however said the next move could be a cut should the economic environment deteriorate. The Czech koruna lost ground after the policy decision.
Scandinavian PMI business confidence slipped hard in April. The indicator fell from a lofty 56.3 to a still solid 53.8 in Norway but printed at a poor 50.9 (down from 52.5) in Sweden. Markets were expecting a slight uptick from last month. The Swedish krona manages to hold ground but it’s Norwegian counterpart is losing territory as oil is feeling some selling pressure.
