Markets
The bond selloff eased markedly in Europe last Friday, in part following comments from ECB’s Lane and Schnabel. The latter said rising real long-term yield could threaten the recovery. That in turn might lead to more action by the central bank. In an overall cautious setting, the German yield curve bull flattened with yields changing from -1.1 bps (2-yr) to -5 bps (30-yr). USTs outperformed the Bund with the sharp increase in short-term yields on Thursday reversing (2-yr yield; -4.5 bps). Longer-dated bonds fell up to 14.5 bps (20-yr). Upward pressure on bond yields from the commodity side also subsided somewhat as the likes of oil, copper and nickel all declined on Friday. European equities slumped about 1.3%. Wall Street finished mixed with the DJI down 1.5% but the tech-heavy Nasdaq eking out a 0.56% gain. The dollar rebounded forcefully despite real yields being the main driver behind the rates decline. EUR/USD tested and eventually fell below the 1.21 support area to finish at 1.2075 thus tumbling out of the short-term upward trend channel. Germany’s Schnabel not ruling out an interest rate cut weighed on the common currency. DXY tested 91 but finished at 90.8. USD/JPY extended gains to close at 106.57. EUR/GBP tried to build on the Thursday’s jolt. The adventure north of 0.87 (resistance area) didn’t last however as the pair closed the week at 0.867. BoE Chief Economist Haldane warned for central bank complacency about accelerating CPI, striking a rare hawkish note in a dovish central bank environment.
Asian mood is constructive at the start of the new week and month amid a mixed bag of data (cf. below). Japanese stocks outperform along with yen underperformance. The bond rout also eases in Asia. The RBA doubled the amount of QE for longer-dated bonds (A$4bn) to successfully stem the yield surge. Australia’s 10-yr yield tumbles 25 bps. New Zealand’s loses 17 bps. The US yield curve sees the very long end (20-yr, 30-yr) underperforming. The House approved the 1.9tn aid plan (that includes a rise of minimum wages) over the weekend. German Bunds trade a tad higher. The dollar trades heavy but EUR/USD so far failed to retake 1.21.
Today’s economic focus is on the US ISM manufacturing confidence. Most regional confidence indicators have beaten expectations, suggesting some upside for the ISM. We keep a close eye on the price subseries which soared to the highest level since 2011 in January. The US 10-yr yield remains close to the important 1.43% resistance level after clearing it temporarily last week as fiscal stimulus chatter continues. The overall uptrend remains intact and could be supported by data today and later this week (ISM services, payrolls). EUR/USD should recover 1.21 for the pair to retain the short-term upward momentum. An upward ISM surprise might complicate that however. Sterling eyes the UK budget to be announced on March 3. However, finance minister Sunak already hinted at a corporate tax rise. Nevertheless, the pound performs well with the technicals still in its favor. EUR/GBP stays south of 0.87.
News Headlines
Australian data this morning showed strength in different parts of the economy. The Corelogic house price index rose 2.1% M/M in February, the fastest pace since August 2003. Values were up 4% Y/Y. The rise in prices both occurred in major capitals and the regional market. At the same time, the value of home loans jumped 10,1% in January.The labour market also shows signs of further improvement. The ANZ job advertisements index rose 7.2% M/M in February. The indicator reached the highest level since October 2018. The RBA decides tomorrow.
The economic recovery mostly remains on track, Asian data showed this morning. The Japan Jibun final manufacturing PMI rose from 50.6 to 51.4, reaching the highest level in 2 years. Korean exports rose a solid 9,5% M/M, the fourth consecutive monthly gain. The Indian manufacturing PMI also held at high 57.5 (from 57.7). On the other hand, the China Caixin manufacturing PMI dropped to 50.9 in February, the lowest level since May last year. The decline was driven by a contraction in export orders. However, forward looking component remain positive, suggesting that activity might further recover after a slowdown around the Lunar New year.
