Markets
European PMIs came in mixed with the manufacturing once again taking the lead over services. The euro area wide manufacturing PMI jumped from 54.8 to 57.7 (54.3 expected), the highest level since February 2018. The ongoing recovery came amid a surge in production, new orders and even a modest employment increase (the first since April 2019). Price pressures (commodity prices, freight costs) continue to build strongly with rising input price pressures (at the fastest pace in a decade) also finally finding feeding into prices charged to clients. Services sector confidence however continues to feel pressure from the lockdown measures. The headline indicator unexpectedly fell from 45.5 to 44.7 with key subcomponents entering deeper contraction territory (<50). Despite the services sector markets weren’t too unhappy with the PMI outcome. As do the survey respondents (optimism 12 months from here rose to the highest since March 2018), markets feel confident about the economic outlook thanks to the vaccine roll-out. European stocks snap a three-day losing streak to gain about 0.8%. The EuroStoxx50 overcomes the 3700 hurdle once again with cyclicals leading the advance. US indices open with modest gains up to 0.5%. Core bond yields are on track to close near recent (in the US: recovery) highs. US yields rise 2 bps (5-yr) to 3 bps (30-yr) but don’t trigger any (equity) market nervousness today. The 10-yr yield (1.32%) escapes the upward trend channel to the topside and could finish the week beyond the March peak. German bunds underperform. The curve bear steepens with yields up 4.2 bps at the very long end. Germany 10-yr yield (-0.32%) gapped north of the -0.34% resistance. The European 10y swap rate turns positive for the first time since 2020 as reflation bets are on again. Peripheral spreads tighten with Italy (-4 bps) outperforming.
In a week full of swings, the dollar today again traded the reflation-script. The greenback loses especially against cyclical currencies including the likes of the Aussie and kiwi dollar as commodities continue to remain well bid. NZD/USD is nearing 0.73, AUD/USD sprints north of its recent high to trade at 0.786. EUR/USD already took out 1.21 in the run-up to the PMIs and extend its gain afterwards to trade at 1.214 currently. USD/JPY remains under pressure as well though is off intraday lows to change hands at 105.5. UK data was mixed with very disappointing January retail sales but a stronger-than-expected rebound of PMI confidence (composite still just shy of the neutral 50). Sterling’s losses, already very limited to start with, were in any case temporary. EUR/GBP tried to conquer 0.867 resistance but failed to do so and instead reversed course even as an influential BoE policy member brought negative rates back in the picture (cf. below). EUR/GBP (0.865 currently) is set to close the week below that high profile reference, paving the way to 0.862 and 0.857 from a technical point of view. Cable is testing the 1.40 big figure.
News Headlines
BoE MPC member Gertjan Vlieghe reopened the debate on negative interest rates. Contrary to the views aired by other MPC members of late, Vlieghe said that there is little QE can do to add stimulus to the economy when long term interest rates are already very low and as there is ample liquidity. The BoE should look for other tools to deliver further stimulus if needed, while admitting no more stimulus is needed when the economy meets the February BoE outlook. However, negative rates might help to address labour market slack.
The minutes of the Riksbank February policy meeting showed that part of the Riksbank board still sees negative interest rates as a viable option to support the recovery if needed. BoE Deputy governor Skingsley said that a clear fall in inflation expectations would be a convincing factor to support a decision to cut the repo rate below zero again. At EUR/SEK 10.035, the krona today held within reach of the post-corona top against the euro reached around the turn of the year.
