Markets
Core bonds traded a choppy pattern with USTs underperforming the Bund today as markets await Biden raising the curtain on a new stimulus plan. Details of the proposal, dubbed “The American Jobs Plan” were already made available however. Biden aims to spend $2.25tn over the next eight years, channeling $620bn for transport, $650bn for initiatives to improve quality of life at home, $580bn for strengthening the manufacturing sector and $400bn for improved elderly care. Tax increases, including a corporate tax raise from 21% to 28%, are supposed to fund the bill but are a very sensitive matter to Republicans and more moderate Democrats in Congress. The direct market impact on US bond yields was limited. Same goes for a very strong and better-than-expected ADP job report. March employment grew with 517k, supported by a 169k increase in leisure and hospitality as the sector gradually reopens. That’s less than the 550k consensus but follows an upwardly revised February (from 117k to 176k). US yields rose more than 4 bps in Asian dealings but pared gains to 1.4 bps (5-yr/10-yr) currently. An attempt by German yields to advance failed with all tenors virtually unchanged to 1 bp lower (long end) vs. yesterday. Peripheral yield changes were marginal. Greece (-2 bps) outperformed. European inflation came in slightly weaker than expected at 1.3% y/y (up from 0.9%) in March but without material market impact. ECB president Lagarde in an interview dared markets to “test us as much as they want”, the central bank has “exceptional tools to use at the moment” and won’t shy away to use them to keep financing conditions favourable. She repeated that risks in the short term are still to the downside but much more balanced in the medium term.
Asian dollar strength faded and eventually reversed in European dealings despite rising yield differentials and a mixed equity sentiment (minor losses/gains in Europe and the US respectively). A greenback pause makes sense after the recent bullish surge and going into the end of the quarter. EUR/USD was headed for the 1.17 big figure but jumped north as soon as Europe joined. Testament to a still-weak euro, the pair didn’t make it much further beyond 1.174 before giving up some of the gains already. EUR/USD is now changing hands near the 1.173 area. DXY also took a breather after capturing 93 yesterday. The trade-weighted USD is little changed near 93.28. The Japanese yen trades weak even as the BoJ will reduce government bond buying (cf. infra). USD/JPY (110.80) tested the 111 lever. Gravity keeps EUR/GBP with both feet on the ground too. The couple even declines a tad to 0.851 and continues to flirt with a return to the downward trend channel. EUR/GBP 0.84 in that case is the final hurdle for a complete retracement to the pre-pandemic and multiyear low in the 0.83 area.
News Headlines
Preliminary inflation in Poland for the month of March was reported at 1.0% M/M and 3.2% Y/Y, up from 2.4%Y/Y in February. The rise was substantially faster than expected (2.8% Y/Y). Compared to the previous month, fuel prices were the main driver behind the rise (6.6% M/M), but food prices and non-alcoholic drinks also rose for the third month in a row. The National Bank of Poland targets inflation of 2.5% with a permissible fluctuation band of -/+ 1.0%. The current higher starting point entails the risk of inflation moving above the NBP tolerance band later this year which, if sustained would make it more difficult for the NBP to keep its ultra-soft monetary policy stance. The zloty hardly reacted to the data, but is trading marginally stronger in a daily perspective, with EUR/PLN currently at 4.65.
The Bank of Japan today announced that it will reduce the total amount and the frequency of its government bond purchases in April compared to March. As a result, the BoJ buying of JGB’s is expected to decline by about 9% in April to JPY 5.9 trillion. The move comes after to bank widened the band for the 10-y yield to move around the 0.0% target to 25 basis points to allow for more flexibility in its quantitative erasing program.
