Sunset Market Commentary

Markets:

Core bonds markets fell prey to a short term short squeeze ahead of the long weekend in the US despite a third straight day of higher price pressures in the US and despite comments from ECB Coeuré who said that the debate on changing the ECB’s forward guidance will start soon. The correction occurs as both the German Bund and US Note future re-entered oversold conditions. The US yield curve bull flattens with yields 1.1 bp (2-yr) to 5.6 bps (30-yr) lower. Changes on the German yield curve range between -1.4 bps (2-yr) and -4.8 bps (10-yr). 10-yr yield spread changes versus Germany are nearly unchanged with Greece outperforming (-9 bps) ahead of a potential rating upgrade by Fitch tonight (currently B-, positive outlook).

Red alert on currency markets this morning where dollar weakness prevailed. USD/JPY gave away 106.50 support despite dovish changes in the BoJ board and intervention talk from Japanese FM Aso. The trade-weighted dollar tested 88.40 support (62% retracement from 2014-2016 rally) and EUR/USD tested the cycle high (1.2537). The 62% retracement (1.2598) remained without reach. Tests failed without significant news on the economic, political, or monetary front and ahead of the long weekend in the US. Markets are closed on Monday for US President’s Day. Around European noon, profit taking on dollar shorts really started to kick in. Between now and the end of February, there will be some kind of trading void with an uneventful eco calendar. Those circumstances suggest that the dollar could get some more breathing space. The failed tests of key levels also suggest a slightly firmer bottom below the greenback though we wouldn’t call for a change in market sentiment yet. Therefore EUR/USD would have to break below 1.2206. Today’s US eco data perhaps slightly added to the intraday momentum with strong housing data and more signs of building inflationary pressures. EUR/USD currently trades below 1.2450, USD/JPY is back above 106 and tries to regain 106.50. The trade weighted dollar moved above 89.

EUR/GBP was a beacon of stability today, trading sideways between 0.8870 and 0.8890. January retail sales disappointed and provide more evidence of reduced consumption as UK households’ disposable income gets squeezed. UK PM May meets with German Chancellor Merkel later today to discuss Brexit.

News Headlines:

UK retail sales barely grew in January (0.1% M/M vs 0.6% M/M expected), providing more evidence that consumers are reluctant to spend amid a squeeze from rising prices. Retail sales rose 1.5% on a yearly basis.

US eco data beat consensus. For a third straight day, price indicators rose more than forecast. January import (1% M/M vs 0.6% M/M expected) and export prices (0.8% M/M vs 0.3% M/M expected) provided more evidence of inflation pressure following CPI on Wednesday and PPI on Thursday. US homebuilding increased to more than a one-year high in January, boosted by a rebound in the construction of single-family housing units, and further gains are likely as building permits soared to their highest level since 2007.

The last polls published by Italy’s main newspapers before a blackout period starting Feb. 17 show that none of the parties or coalitions will be able to form a parliamentary majority.

ECB Coeuré signaled that officials are close to starting talks on altering their policy language as they prepare for the eventual end of bond purchases.