Markets
Core bonds lost some ground today with US Treasuries again underperforming German Bunds ahead of tomorrow’s FOMC meeting. Last minute positioning suggests that (US) investors don’t want to be wrong-footed by a potentially more hawkish Fed. Rising oil prices weighed as well. Stock markets stabilize after yesterday’s heavy sell-off, but we don’t find the rebound convincing. Disappointing German ZEW investor confidence also helps explain the Bund’s resilience compared to the US Note future. The US yield curve shifts 1.5 bps to 2 bps higher across the curve with the US 2-yr yield reaching a new cycle high (highest level since 2008). Changes on the German yield curve range between +0.7 bps (2-yr) and +1.4 bps (10-yr). Peripheral yield spreads vs Germany narrow 3 to 6 bps (Italy).
Global FX markets faced plenty of (potentially conflicting) event risk (eg: the tech correction, rumours that US president Trump will announce import tariffs on Chinese goods). Markets also had to digest the avalanche of recent ECB comments/rumours while at the same time looking forward to tomorrow’s Fed decision. The trade war issue is potentially USD negative, but doesn’t affect the US currency too much for now. The euro rebounded yesterday as ECB officials downplayed recent dovish comments. The focus of FX traders turned again to the Fed today. Interest rate differentials widened again in favour of the dollar. The market remains divided whether Fed governors will signal four rather than three rate hikes in 2018, but currency investors apparently don’t want to be positioned short USD going into tomorrow’s Fed meeting which includes the first press conference of Fed chairman Powell. Fear for a hawkish Fed prevails. EUR/USD reversed yesterday’s ECB-inspired rise and trades again in the 1.2275 area. The price pattern of USD/JPY is less unequivocal, but the pair also trades well off the recent lows, near 106.50. For now, the dollar has the benefit of the doubt.
Sterling profited modestly from the EU/UK agreement on a transition period yesterday. The focus turned to UK price data today. Headline CPI declined slightly more than expected to 2.7% Y/Y from 3.0% Y/Y. The reaction of sterling was modest and even a bit inconclusive. Cable declined back to the 1.40 handle. EUR/GBP held a negative bias (due to EUR/USD weakness) and trades near 0.8770. We have the impression that the market concluded that the BoE will raise rates in May anyway, unless data sharply deteriorate. This is slightly GBP supportive. The 0.8690 support comes again on the radar. We assume that the BoE will have to be really hawkish to break that level.
News Headlines
British inflation was weaker than expected in February (2.7% Y/Y from 3.0% Y/Y vs 2.8% Y/Y expected) as the impact of the 2016 Brexit vote faded, easing some of the squeeze on households’ spending power but doing little to change bets on a BoE rate rise in May. The figures also suggested less pressure in the pipeline for consumer prices. Manufacturers increased the prices they charged by the least since November 2016 as the cost of their raw materials — many of them imported — rose by 3.4%, way down from a peak annual increase of nearly 20% in January last year.
German ZEW investor sentiment slumped to its lowest level since September 2016 as concern intensified that Europe’s largest economy could be hurt by a global trade war and a strengthening euro. The forward looking expectations indicator dropped from 17.8 to 5.1 while consensus only expected a setback to 13.0. The current situation index declined from 92.3 to 90.7 (vs 90.0 expected).
The latest discussions of the Joint Technical Committee of OPEC and non-OPEC nations in Vienna concluded that the oil market will re-balance between 2Q and 3Q as global inventories shrank further in February, people familiar with the matter say. Brent crude rose from $66/barrel to $67.30/barrel.
