Markets
Yesterday’s moderation in US bond market sell-off also brought some calm to other parts of the markets that faced heightened volatility of late. This evening’s 10-y US bond auction and tomorrow’s ECB policy meeting/assessment are upcoming potential triggers to decide whether there is room for a more prolonged pause in the bond market repositioning. Today, EMU data didn’t add much to the global debate. Contrary to disappointing German data published earlier this week, French January production delivered quite a substantial upward surprise (3.3% M/M and -0.2% Y/Y versus 0.5% and -2.8% expected), however, with limited direct market impact. This afternoon, the market focus turned to the US inflation data. At least this month, inflationary pressure remained rather muted. Core inflation even slightly eased to 1.3% from 1.4% Y/Y in January. Headline inflation accelerated from 0.3% M/M and 1.4% Y/Y to 0.4% M/M and 1.7% Y/Y. However, as this rise was mainly driven by higher fuel and other energy-related prices, the report didn’t contradict the Fed’s narrative that current inflation uptick is mainly temporary/transitory and doesn’t really alter the structural LT inflation outlook. Treasuries reversed part of the earlier losses after the release. The US yield curve steepens slightly with the 2-y up 0.4 bp and LT yields up to 1.8 bp higher ( 30-y). German bunds outperform Treasuries as investors look out for tomorrow’s assessment from ECB’s Lagarde on recent rise in yields. The German yield curve flattens with the 10-y & 30-y yield declining 2.0 & 2.7 bp respectively. After a further tightening earlier this week, 10-y intra-EMU spreads hardly moved, with Greece the exception to the rule (-5bp). The more benign interest rate context together with better growth prospects ahead continues to support European equities. The EuroStoxx 50 (+0.75%) is setting a new post-corona top and is nearing February 2020 levels. The DAX is setting new record levels. US equities also open with solid gains (Dow/S&P + 0.70%, Nasdaq +1.25%). The Vix volatility index declines further (22.86).
The broader easing of market volatility and a ‘soft’ US core CPI also capped further USD gains. EUR/USD held a tight range in the upper part of the 1.18 big figure this morning, but rebounded north of 1.19 (currently 1.1915) after the US inflation. USD/JPY (108.40) also returned below the 109 mark despite the risk-on. For now, (US) yields are more important than a risk-on/risk-off narrative. Even so, both for EUR/USD and for the DXY index, the technical picture hasn’t changed yet. EUR/USD needs a return north of 1.1952 to give some comfort short-term. For the DXY 9160/75 remains a first downside reference (currently 91.85). EUR/GBP showed absolutely no directional tendency. The pair held a narrow range between near 0.858/0.855. The 0.08541 correction low remains within reach.
News Headlines
According to people familiar with the monetary policy review, officials at the Bank of Japan are looking at ways to allow bond yields to fluctuate more freely. One way to do so is by disclosing fewer purchasing details ahead of its bond-buying operations. A widening of the current range of 20 bps on either side of its 0% 10-yr yield target was more or less ruled out by governor Kuroda before parliament last week.
Czech inflation slowed from 1.3% in January to 0.2% m/m in February (vs. 0.3% expected). That brought the yearly figure to 2.1% vs. 2.2% the month before and 0.4 ppt higher than the CNB’s own forecast. Higher fuel and car prices as well as some inflation in leisure activities drove the minor increase. Negative base effects (price hike of tobacco and alcohol last month) accounted for almost half of the overall slowdown. The Czech koruna trades muted after a strong session yesterday. EUR/CZK hovers around 26.2.
