Markets:
Global core bonds extended yesterday’s rebound, but for different reasons. The corrective bull steepening after yesterday’s FOMC meeting didn’t continue in Asian dealings or at the start of European trading. Disappointing EMU PMI’s nevertheless generated a new bid in core bonds, with this time mainly the longer end of the curve profiting. The move accelerated after investors added the stock market sell-off to the equation. Risk sentiment deteriorated ahead of US President Trump’s expected announcement of additional tariffs against China. The uncertain nature of China’s reply is worrisome as well. The US yield curve bull flattens at the time of writing with yields 2.3 bps (2-yr) to 6.3 bps (30-yr) lower. The US 10-yr yield approaches 2.8% support. German yields drop between 2.1 bps (2-yr) and 5.5 bps (10-yr). 10-yr yield spread changes versus Germany widen up to 2 bps with Portugal (+8 bps) and Greece (+12 bps) underperforming.
EUR/USD briefly rallied further at the start of European dealing as a slight ‘disappointment’ on the Fed’s rate hike commitment weighed on the dollar. However, dollar negativism eased soon as markets realized that Fed policy normalization remains firmly in place. EMU PMI’s again missed the consensus by a big margin, capping potential euro gains. EUR/USD drifted lower in the 1.23 big figure. Risk sentiment turned further negative. This was neutral for EUR/USD (currently 1.2325 area). USD/JPY declined to the 105.25/30 area, but regained a few ticks later. EUR/JPY dropped temporary below 130, but yen buying eased as US equities tried to fight back after initial losses.
The UK calendar contained two interesting features today: February retail sales and the BoE’s policy decision. Retail sales were slightly stronger than expected at 0.8% M/M, but the January release was downwardly revised and December was also very weak. So, Q1 private consumption looks rather poor. Sterling tried a cautious up-tick, but the move stalled soon. The BoE as expected left is policy rate (0.5%) and the stock of asset purchases unchanged, but two members voted to raise the base rate (7-2 vote). Sterling spiked higher on the announcement. EUR/GBP tested 0.8688 support, but a sustained break didn’t occur. EUR/GBP trades in the 0.8725/30 area. The MPC minutes retained the assessment of the February inflation report that excess demand growth during the policy horizon warrants a gradual, but limited tightening. The BoE left the door open for a May rate hike, but this wasn’t really a surprise anymore. Today’s price action confirms that the 0.8688/52 support doesn’t give away that easily.
News Headlines:
The Bank of England kept interest rates steady, but two policymakers unexpectedly voted for a hike, boosting confidence among investors that borrowing costs will rise in May for only the second time since the 2008 financial crisis. The statement and Minutes largely resembled the February inflation report. UK retail sales rose more than expected in February as spending at supermarkets jumped, but a poor month for non-food stores suggests the squeeze on living standards is continuing to weigh on consumers.
The euro area’s private-sector economy grew at the slowest pace in 14 months in March, as service providers and factories struggled to keep up with demand. The EMU composite PMI slid to 55.3 from 57.1 (vs 56.8 consensus). On a national level, both German and French PMI’s disappointed. German Ifo investor confidence faced a small setback in March, both in the expectations and current assessment components, but the outcome was near forecasts.
The Polish central bank’s next move in interest rates might be a cut, central banker Zyzynski said, adding there was currently no reason to change the level of interest rates. Zyzynski’s comments reflect the stance of central bank Governor Glapinski.
