Markets:
Global core bonds lost slightly ground today is a lacklustre session. US Treasuries underperformed German Bunds. Traded volumes in the Bund were extremely low after a delayed start because of technical problems at Eurex. Dovish comments by ECB chief economist Praet, who isn’t unhappy with the recent market repositioning, and a downward revision to headline EMU CPI didn’t inspire Bund traders to extend this week’s rally. US eco data printed mixed with weaker housing data and stronger industrial production & Michigan consumer confidence. The latter triggered more underperformance of the US Note future. Overall, we think that most investors just decided to stay on the sidelines though ahead of next week’s Fed meeting and not knowing what to expect more from the White House after a turbulent week. At the time of writing, the US yield curve steepens with yield changes ranging between -0.6 bps (2-yr) and +1.7 bps (30-yr). German yields decline around 0.5 bps across the curve. 10-yr peripheral yield spreads vs Germany narrow 2 to 4 bps. Fitch (BBB; stable outlook) and Moody’s (Baa2; negative outlook) decide on the Italian credit rating tonight. We expect no changes. S&P updates the Portuguese BBB- (stable outlook) rating.
EUR/USD maintained most of yesterday’s decline this morning. The EMU February inflation was revised even lower from an already low flash estimate (1.2% Y/Y) to a final figure of 1.1% This confirms recent analysis of ECB’s Draghi and Praet that there is still plenty of work to do on inflation. The immediate reaction to the report was limited. However, the topside in EUR/USD was blocked and the pair finally turned south. The dollar captured a better bid going into the US session. US data were mixed, but good production and a strong Michigan consumer confidence made investors ponder that there might not be much reason for the Fed to be soft. Spreads widened again slightly in favour of the dollar. EUR/USD trades near 1.2285. USD/JPY rebounded from 105.60 back above 106. Dollar gains remain modest, but the US currency is getting the benefit of the doubt, at least against the euro.
The UK eco calendar was empty today. News flow about the UK was mixed, but the balance tilted slightly in favour of sterling. EUR/GBP declined from 0.8840 this morning to 0.8815 currently. On the one hand, the BoE warned of material risks from Brexit and added that Britain becomes more and more reliant to the “kindness of strangers” to finance its large current account deficit. Ratings agency Moody’s warned that the UK might struggle to make the kind of cuts to public spending it has announced last week. On the other hand, sources suggested that Britain and the EU could agree a “provisional” deal next week on a post-Brexit transition period, stressing that this will only happen if London and the bloc resolve all divorce matters first.
News Headlines:
ECB chief economist Praet opposed shifting the institution’s language on its stimulus plans any time soon, saying rising labor supply suggests the EMU’s economic slack may be greater than previously thought. It could be a potential drag on already weak inflation. The February headline CPI reading faced an unexpected downward revision from 1.2% Y/Y to 1.1% Y/Y today, because of a fall in unprocessed food prices and reduced energy inflation.
US eco data printed mixed. Housing data disappointed. February housing starts declined by 7% M/M following an unusually strong January figure (10.1% M/M). Building permits also dropped, by 5.7% M/M, following a 5.9% M/M increase in February. US industrial production jumped 1.1% in February, the largest increase in four months, due to a weather-related rebound in construction and a rise in output from oil and gas fields and mines. Michigan consumer confidence reached its highest level since 2000 (102). 1-yr inflation expectations rose from 2.7% Y/Y to 2.9% Y/Y.
