Markets
Core bond yields yesterday eased from Friday’s surge. Scant economic data, barring a strong NY Empire manufacturing survey, suggested trading was mainly sentiment driven. Looming key events (US retail sales, Fed meeting) and talk of higher corporate and personal taxes to fund the stimulus measures may have kept USTs well bid. In the euro zone, vaccination (campaign) woes after a growing list of countries including France, Germany and Italy suspended the use of AstraZeneca’s shot held a bottom below German Bunds. The US yield curve bull flattened with yields changing -1.3 bps (5-yr) to more than 2 bps (10 to 30-yr). German yields declined up to 2.8 bps (10-yr). Peripheral spreads barely changed. Greece (-3 bps) outperformed. European stocks pared opening gains going into US dealings to finish slightly in red. Wall Street’s intraday trading pattern was the exact opposite. The Nasdaq (+1.05%) outperformed. The dollar held a small upper hand on the FX market. EUR/USD drifted lower from 1.195 to 1.193. USD/JPY managed to stay north of 109. EUR/GBP traded weak at first. The pair tested support near 0.855 in a sharp move down before rebounding towards but eventually closing below the 0.86 area (0.858). The EU began legal action against the UK (cf. infra). The combination of UK inflation expectations rising to the highest level since 2008 and a drop in UK real yields also weighed the British currency down.
Most Asian-Pacific equity markets print gains in quiet trading this morning. Australian (and New Zealand) 10-yr bond yield erases yesterday’s 10 bps spike in the wake of the latest RBA minutes (cf. infra). Core bonds extend yesterday’s gains, pushing yields about 1.5 bps lower in the US. The dollar is trading muted near yesterday’s closing levels.EUR/GBP is advancing pretty smooth this morning, surpassing the 0.86 mark and nearing the upper bound of the downward trend channel.
Today’s eco calendar contains February US retail sales. January saw a significant boost from the stimulus pay cheques agreed end of last year. A pullback, even when larger than expected, shouldn’t be viewed as particularly worrying. More so because Congress recently approved another round of stimulus cheques which are to be distributed soon. Tonight’s US 24bln 20-yr bond auction will give us a final sense of market appetite before the Fed policy meeting. Based on yesterday’s market moves and trading themes, we expect some (sideways) consolidation on core bond markets. The US 10-yr yield is hovering around 1.6% support/resistance. Germany’s 10-yr yield should find support near -0.34%. In EUR/USD we stick to the view that the 1.19 area will hold. The AstraZeneca worries are an obvious potential euro negative. The European Medicine Agency meets Thursday. This morning’s weaker sterling eyes the BoE on Thursday. A sustained EUR/GBP leap higher probably requires a clear softer BoE tone.
News Headlines
The Reserve bank of Australia in the March minutes maintained the line that a sustained rise inflation wasn’t to be expected soon despite the recent rise in commodity prices. The RBA stressed that wage growth needs to be materially higher for inflation to rise in a sustainably. The RBA expects CPI inflation to temporaril y reach tot the top-end of its target band by the middle of the year, but sees underlying inflation below 2% in 2021 and 2022. In this context, it considers a rate hike unlikely before 2024. The RBA assessed that lending standards remain sound. The Board sees greater benefits for financial stability from a stronger economy but acknowledged the importance of closely monitoring risks in asset markets. Aussie yields drop, the AUD hardly reacted (AUD/USD 0.7755).
The EU started legal action against the UK. Brussels accuses the UK of unilaterally changing the trading arrangements for Northern Ireland which EU says are a breach of the Brexit deal. As Northern Ireland remains part of the EU single market, checks on goods imported from the rest of the UK are needed. The grace period for some of the checks expires end March, but Britain extended the period to end October and considers it a technical decision. The ‘infringement procedure’ ultimately could lead to fines or trade tariffs being imposed on the UK.
