US and European yields were downwardly oriented yesterday. (European) investors took a cautious stance going into today’s ECB policy meeting. Headlines/rumours that the ECB would downgrade its growth forecasts enough to warrant a new bank funding program initially had only a modest impact on European (and US) yields. Later yields drifted further south as (mainly US) equities fell prey to profit taking. US yields declined between 1 bp (30-y) and 2.8bp (2-y). German Bunds outperformed Treasuries with yields declining between 1.4 bp (2-y) and 4 bp (10-y).
oday, there are some second tier eco data in EMU and the US, but the focus for bond trading will be on the ECB policy decision and especially on president Draghi’s press conference. At the January meeting, the ECB admitted that risks to the economy had tilted to the downside. This will also be visible in a substantial downgrade of the ECB growth forecast for 2019. However, the ECB will probably maintain the assumption that that current slowdown is temporary in nature and that growth will probably pick up in the second half of the year. In this scenario, there is no need for the ECB to already change its forward guidance on the timing of a change in its policy rates. Current guidance is open-ended as the ECB committed not to tighten policy before the end of the summer. At least for now, this guidance can be maintained. We also expect the ECB to do the groundwork for a new bank financing program (TLTRO’s) even as the scope and conditions will probably only be revealed later (e.g. after a task force has explored the options). Markets are currently positioned for a first rate hike only well into 2020. The absence of a clear shift in the ECB interest rate guidance could support the tentative bottoming process in yields that started last week (but admittedly stalled this week).
Yesterday, the EUR/USD correction from earlier this week slowed. EUR/USD settled in a sideways range near 1.13. On the euro side of the equation investors were counting down to today’s ECB policy meeting. On the US side of the story, data (ADP in line, big trade deficit) were not able to provide clear guidance. This morning, the dollar still shows no clear trend (USD trade-weighted near 96.85; EUR/USD near 1.1305). The yen is gaining a few ticks as Asian equities are mostly guided lower by yesterday’s correction in the US. Later, the communication at the ECB press conference will likely set the tone for EUR/USD trading today and maybe even further out. In our preferred scenario of the ECB maintaining the view that current eco slowdown is mainly temporary and if the bank accordingly doesn’t change its interest rate guidance in a profound way, there is room for EUR/USD to resume last week’s rebound back higher in the 1.12/1.15 trading range.
Yesterday, sterling basically traded sideways. EUR/GBP hovered near the 0.86 big figure. UK and EU officials working on Brexit deal in Brussels indicated that talks went difficult. However, this time there was little (negative) impact on sterling. Today, there are few important data in the UK. So, sterling trading will probably again be driven by the news/rumours from Brussels, if any. Will sterling longs hold their nerves under control as the March12 deadline is nearing?
The Fed in its Beige Book preparing the March policy meeting indicated that growth slowed in some sectors at the end of January and early February due to the government shutdown. However, most districts still indicated slight-to-moderate growth. Labour market conditions were still described as being tight.
Overnight, data from Australia were mixed. The country’s trade surplus jumped in January to A$ 4.55 bn from A$ 3.8bn in December. However retail sales disappointed again (0.1% M/M). The Aussie dollar (AUD/USD near 0.7045) is trading slightly off this week’s low touched after poor Q4 growth published yesterday.