Markets
Global core bonds gained ground today with US Treasuries outperforming German Bunds. The move occurred after US President Trump suggested performing an air strike against Syria without Russian backing. The new uptick in geopolitical risk, following the US/Chinese trade dispute, weighed on risk sentiment. US CPI data increased in line with expectations with the core reading back above the Fed’s 2% target. ECB president Draghi said that he expects wages and inflation to rise as the economy improves. He doesn’t expect a big direct impact from the US/Chinese trade conflict, but warns about consequences via the trust channel. Data and central bank comments were overshadowed by geopolitical concerns though. The US yield curve bull flattens at the time of writing with US yields 1.2 bps (2-yr) to 4.7 bps (30-yr) lower. The German yield curve shifts in similar fashion with yields 0.1 bp (2-yr) to 2.8 bps (30-yr) lower. The Portuguese debt agency successfully launched a new 15-yr benchmark (€3bn Apr2034). The bond was priced to yield MS +102 bps compared to initial guidance in the MS + 105 bps area.
The dollar traded with a negative bias earlier this week and this pattern continued today. The global risk-off sentiment and geopolitical uncertainty (Syria) were a negative for the dollar, rather than for the euro (or of course the yen). EUR/USD trended higher in the 1.23 big figure. USD/JPY dropped back below 107. The US CPI data were close to the expectations, but monthly data (-0.1% M/M headline, 0.2% M/M core) don’t indicate any acceleration in price rises yet. The report didn’t help the dollar. EUR/USD trades currently near 1.2375. The overall USD momentum remains sluggish.
Today, a series of disappointing UK data triggered profit taking on the recent rally of sterling. UK February production data missed the consensus estimate by quite a wide margin. Manufacturing production even declined 0.2% M/M resulting in a 2.5% Y/Y rise (+0.2% M/M and 3.3% Y/Y was expected). Construction output also declined for the second consecutive month. Last but not least, the NIESR March GDP estimate indicated that Q1 growth maybe slowed to 0.2% Q/Q. EUR/GBP traded again close to the 0.87 barrier this morning, but rebounded to 0.8735/40 in the wake of the data releases (currently 0.8725 area). Cable (1.4175/80) also declined off the recent top. Expectations for a May BoE rate hike eased marginally (still about 85% chance).
News Headlines
President Donald Trump on Wednesday said that U.S. missiles “will be coming” to Syria, and warned he was willing to challenge Russia directly in launching a military strike against Syrian President Bashar al-Assad over an alleged chemical-weapons attack. (WSJ)
US CPI inflation printed nearly bang in line with expectations. Headline CPI declined by 0.1% M/M, below the 0% consensus. Inflation rose by 2.4% on a yearly basis, accelerating from 2.2% in February. Underlying core inflation, which strips out volatile components like food and energy, rose by 0.2% m/m and 2.1% Y/Y as expected and returns above the Fed’s 2% target.
UK production data disappointed in February. Industrial production rose by 0.1% M/M, but manufacturing production shrank for the first time in 11 months (-0.2% M/M), led by output of machinery and equipment. Construction output declined by 1.6% M/M in February. Severe winter conditions weighed on production in February and suggest a rebound next month.
