Markets
Market stress caused by the acceleration in the reflation trade eased yesterday. The steepening trend apparently needs a breather. Eco data were few. The OECD upgraded its outlook for world growth to 5.6% from 4.2%. The US (6.5%) enjoyed substantial upward revision (due to added stimulus). The upgrade for Europe was limited due to the slow start of vaccinations. Still this positive reassessment didn’t prevent an easing on bond markets. The move already started early in Europe and later received ‘confirmation’ from a solid US 3-year auction. The recent rise in yields attracted solid investor interest with a bid-to-cover of 2.69. At the close the US yield curve bull flattened, yields rising between 0.2 bp (2-y) and 8.2 bp (30-y), mainly driven by a decline in real yields. German yields showed a similar tendency, but at a much more moderate pace (2-y -0.1 bp, 10-y -2.4 bp). The combination of lower core yields and a global risk-on supported peripheral EMU bonds with 10-y spreads for the likes of Italy (-4bp) and Greece (-3bp) narrowing. European equities extended Monday’s gain (+0.5%). The Nasdaq outperformed (3.69%) on the decline in LT yields. Several commodities including copper also show tentative signs of a topping out pattern. The USD ceded modest ground, but given the moves in equities, commodities and (US) yields, the correction was modest. EUR/USD closed at 1.1901. The TW index (DXY) finished at 91.95. The 91.60 neckline, easily stayed out of reach. Sterling also showed ongoing resilience against the euro. EUR/GBP failed to break away from the 0.8570 pivot (close 0.8568).
This morning, Asian equities show modest gains given yesterday’s WS rebound. China slightly outperforms (1.0%). South Korea and Australia closed in red. RBA Governor Lowe pushed back expectations for an early rate hike and reiterated the RBA’s intention to keep rates unchanged until 2024. The 3-y yield returned below the 0.1% target. The Aussie dollar eases slightly (0.7675), but this is also due to renewed USD strength. USD/JPY (108.85) already reversed yesterday’s decline. EUR/USD also failed to hold north of 1.19 (currently 1.1875).
There are only second tier date in Europe today. US CPI inflation headline inflation is expected to rise 0.4% M/M and 1.7% Y/Y (from 1.4%). However, base effects from last year probably only come in play over the next months. Markets will also keep a close eye at the auction of 10-y Treasuries ($ 38 bln). The jury is still out, but a new successful sale could be a an indication that the rise in US yields might be ready for a pause, at least temporary. In theory, this might also slow recent rise of the dollar. However, that at least isn’t visible yet this morning. The EUR/USD picture remains fragile with the correction low (1.1836) still within reach. The DXY-index is also supported by a constructive ST technical picture. Maybe some underlying euro caution might be in play ahead of tomorrow’s ECB meeting. EUR/GBP also still struggles not the break below the 0.8570/41 support.
News Headlines
Chinese inflation in February slowed with -0.2% y/y after already registering a -0.3% y/y decrease in January. The drop came on the back of falling food prices (-0.2% y/y after a 1.6% gain the month before). Core inflation was flat while services inflation clawed back from a -0.7% drop in January to -0.1% y/y. Factory inflation (PPI) however advanced from 0.3% y/y to 1.7%, the fastest pace since end of 2018. Prices in mining industries soared from 1% y/y to 6.8% both on base effects and higher commodity prices.
The US house approved a bill that expands protections for labor union organizing and collective bargaining by a 225-206 vote. The bill now goes to the Senate where it needs at least 60 supporters to advance. The bill was already approved in the House last year but died in then-Republican-held Senate. If passed, it could have longer-term implications for US wage-setting.
