Markets:
Global core bonds lost some ground today with German Bunds underperforming US Treasuries. Rising EMU inflation expectations and comments by ECB Villeroy were at play. The EMU 5y5y inflation forward trades at 1.72%, the highest level since February. German construction workers over the weekend reached agreement over a 6% pay hike and provide more anecdotic evidence that inflation pressures are building. IGM and the public sector already reached pay deals earlier this year. ECB Villeroy clarified the ECB’s current forward guidance on rates (rates will remain low well past the end of net asset purchases). “Well past” means that a first rate hike could come some quarters after ending net bond buying, but not years. Markets currently only discount a positive 3-month Euribor-rate by the end of 2019. Villeroy also suggested that APP will end in September or December. He blames the Q1 growth slowdown to temporary factors, but warned that growth rate can’t accelerate forever. ECB Lautenschlaeger and Mersch didn’t touch on monetary policy, while Praet repeated last week’s speech. ECB Coeuré speaks tonight. Cleveland Fed Mester, who votes on monetary policy this year, aligned with the ‘gradual’ dot plot. The US eco outlook is positive and inflation will remain at a sustained 2% over the next 1-2 years.
German yields add 1.7 bps (2-yr) to 4.3 bps (10-yr). Changes on the US yield curve range between + 1.3 bps (2-yr) and +2 bps (10-yr). The US 10-yr yield remains close to, but below the psychological 3% mark. The moves on rate markets gave the euro a slight edge over the dollar with EUR/USD up from 1.1950 overnight to the 1.1980 area currently. EUR/GBP on the other hand traded listless around the 0.8820 pivot ahead of tomorrow’s Brexit cabinet meeting to discuss plans for a post-withdrawal customs union. 10-yr yield spreads vs Germany narrowed up to 3 bps. Last week’s underperformance of BTP’s ended even if a populist Lega-5SM coalition is about the get the green light from President Mattarella. Greek bonds don’t react to rumours that the country’s debt agency plans to tap the market twice this year, including a first 10-yr issue for a decade.
News Headlines:
The Catalan parliament has voted committed separatist Joaquim Torra as the region’s new leader, ending a five-month political deadlock and setting the stage for fresh confrontations between Barcelona and Madrid. (FT)
A global oil glut has been virtually eliminated, according to OPEC figures, thanks in part to an OPEC-led supply cut deal in place since January 2017 and fast-rising global demand. Oil inventories in developed nations in March fell to 9 million barrels above the five-year average. That’s down from 340 million barrels above the average in January 2017. (Reuters)
UK PM May will focus on negotiating a backstop plan to avoid a hard border between the UK and Ireland as the battle inside her Cabinet over a Brexit trade plan drags on. Discussions among senior ministers over how closely to mirror the EU’s tariff and customs rules after Brexit will probably last for at least another two weeks, according to an official. With that in mind, the summit of EU leaders at the end of June is likely to focus on finding an insurance plan that would avoid a hard border, if no other arrangements are in place, the official said.
Total EMU investment (both from the public and the private sector) was equivalent to 20.5% of GDP last year. That’s 2.7 percentage points below pre-crisis levels (23.2% in 2007).
