Markets:
The German Bund opened lower in a catch-up move following yesterday’s German Labour Day Holiday. Lackluster trading characterized the European session with markets mainly counting down to tonight’s FOMC verdict and ignoring Q1 EMU GDP data (in line with forecasts). The US Note future started outperforming despite a strong ADP labour market report and despite the US Treasury’s quarterly refinancing announcement. The latter, as expected, showed another increase in debt sales stemming from the giant fiscal stimulus package. The argument favours higher long term US yield in the longer run though, especially since it is accompanied by the Fed’s balance sheet reduction. Today’s intraday move suggests some final, technically insignificant, positioning into the Fed. The US central bank will probably label soft Q1 GDP as transitory while sharpening its inflation rhetoric and preparing a June rate hike. The short term market reaction might be muted, but this scenario suggests higher US rates in the medium term through an increased probability of 2 (FOMC median) instead of 3 additional rate hikes this year. The German yield curve bear steepens at the time of writing with yields 1 bp (2-yr) to 2 bps (30-yr) higher. Changes on the US yield curve are limited to 1 bp. 10-yr yield spread changes vs Germany are close to unchanged with Italy outperforming (-4 bps) after Italian president Mattarella ruled out rumours of a snap election in June.
There were several interesting data in the EMU and in the US today. However, this time, they weren’t able to kick-start a new intraday trading dynamics in the major USD cross rates. EMU Q1 GDP was reported exactly in line with expectations. The US private sector added 204k jobs according to the ADP labour report. This report was also close to forecasts. Investors have shifted into wait-and-see modus ahead of this evening’s Fed policy statement. EUR/USD hovers near the 1.20 big figure. USD/JPY is holding in the 109.75 area. The Fed is largely expected to keep its policy unchanged. However, if the Fed upgrades its assessment on inflation and the market would gradually tilt further to three additional Fed rate hikes rather than two, the dollar might remain well supported.
The most recent sterling correction slowed today. EUR/GBP struggled to extend its rebound north of 0.88 this morning. Cable also showed some tentative signs of bottoming out. Mid-morning, the UK April construction PMI rebounded from 47.0 to 52.5 (only 50.5 was expected). In the global picture of the UK economy, the construction PMI isn’t the most important pointer to assess the cyclical momentum in the UK economy. However, after last week’s sterling sell-off, it was enough for some sterling shorts to reduce exposure. EUR/GBP trades currently just below the 0.88 big figure. Cable hovers in the mid 1.36 area. For now we don’t anticipate a sustained comeback of sterling yet. The internal debate with PM May’s conservative party on what kind of Brexit the UK should aim for, is again heating op. At the same time, the market has now largely rejected the idea of a May BoE rate hike.
News Headlines:
Eurozone unemployment stabilized at 8.5% while growth in 1Q 2018 slowed down to 0.4% MoM (2.5% YoY). Both figures came in as expected, suggesting some natural rolling over from an extraordinary 2017.
The US labour market remains robust. The ADP report showed that private employers added 204 000 jobs in April, beating 198 000 consensus and recording a >200 000 increase for a sixth month running.
The US Treasury Department will boost the amount of long-term debt it sells to $73 bn this quarter as President Trump’s administration seeks to finance budget deficits set to widen further because of tax cuts and higher spending.
Germany’s debt to GDP ratio will likely drop below 60% in 2019, FM Scholz said at a news conference in Berlin presenting government’s budget plans. The plan foresees no net supply through 2022.
