The EUR/USD fell yesterday, and is close to testing year-to-date lows (1.1098). US 10 year treasury climbed back above 2% (2,012%) after two trading days with rates below. The yuan ended at two-year lows vs the USD as PBOC cut its reference rate. S&P500 is range bound standing at 2110.
As expected, US CPI inflation dipped into negative territory in January (-0.1% y/y), while core inflation remained at 1.6%. Headline CPI inflation is likely to remain close to zero through Q2, but fast forward 9-12 months from now and inflation will likely be “everywhere”, assuming oil prices continue to rise in line with our expectations.
A modest 0.6% rise in January US core capital goods orders was only a small step towards easing our fears of a marked slowdown in business investment. US initial jobless claims rose to 313k in the week including the President’s Day holiday, so we don’t attach much importance to this reading.
Day ahead
Today’s most important data release could be the preliminary CPI data for Germany, which will give a good indication of the flash Euro-area inflation estimate due on Monday. We expect German inflation to remain in negative territory in February, at -0.4% y/y after -0.5% in January.
In the US, revised Q4 GDP data as well as the Chicago PMI, pending home sales and the final February consumer sentiment survey from University of Michigan are in focus.
We expect Q4 GDP growth to be revised from a 2.6% annual rate to 1.8%, due to lower inventory investment than initially estimated and an even larger drag from imports. Domestic final demand will probably be little revised. The consensus forecast is 2.0%.
In the Nordics, all eyes will be on Sweden’s Q4 GDP report. We believe GDP rose by a modest 0.1% q/q, corresponding to only 1.2% y/y. This would mark a second straight quarter of weak GDP growth. An outcome in line with our forecast would support the view that the Riksbank will ease its policy further in April as our GDP call is lower than the central bank’s.
Rates
Bond rates in European markets fell sharply yesterday, the exception being Greek rates which rose. Looking more closely across maturities, it was clearly the long end of the curve which saw the largest fall in rates.
Rates on the Portuguese 30Y bond broke new ground falling below 3%, with Finnish and German 30Y rates now all below 1% and approaching 0,9%. The Bund (10Y) also fell, likewise breaking new ground falling below 0.3%.
On the flipside Greek rates rose, possibly in response to a German poll showing some opposition towards extending the bailout for Greece; the worry is that this could become a theme looking at regional elections down the road.
The US 10Y rate was close to unchanged down just 0.3 bp on the back of negative inflation numbers.
In Denmark the central bank yesterday held a second T-bill auction where nothing was sold, sending a clear message to the market that it is determined to halt further capital inflows into the country. With bids amounting to DKK 17.5bn, the appetite for short- dated Danish government paper hasn’t subdued.
FX
The USD broke up yesterday, and if below 1.1212, it becomes very likely that the year-to-date low of 1.1098 will be taken. The Euro- area credit data were better yesterday, and if this suggests the end of deleveraging, it could be bad news for the EUR, at least initially. That said, the end of month price action should not be over-interpreted.
The SEK was among the weakest currencies yesterday, in line with the weakening EUR and other European currencies. With the Riksbank’s opinion piece and the minutes released earlier this week, the chances of Riksbank easing more in April diminished. GDP data today – not a game changer, as relatively strong activity is being ignored by the Riksbank. The inflation expectations survey on 11 March will be decisive – we believe in a rate cut, meaning the EUR/SEK will see higher levels between now and then.
The NOK stayed range-bound yesterday. With oil prices stuck between USD 60 and 62 per barrel, the NOK does not get further impetus to appreciate. With NOK now close to Norges Bank’s projection, it is no longer “undervalued”, thus further oil price increases are needed for support. That said, the market is still pricing a 25 bp cut from Norges Bank. Labour market data (out today) will become increasingly important for Norges Bank going forward.