US stocks retreated (S&P 500: -0.5%) yesterday after the Nasdaq index on Monday closed above 5,000 for the first time in 15 years. Meanwhile, US 10-year Treasury yields remained above 2%. In Asia this morning, the Nikkei (-0.6%) is lower, while EUR/USD is trading below 1.12. AUD/USD is roughly steady around 0.7820 after Australian GDP (2.5% y/y) came out in line with the consensus forecast.
The Reserve Bank of India surprised markets with a cut to its key lending rate for the second time this year, joining a world-wide trend of monetary easing. The central bank cut its main repurchase rate by 25 bp to 7.50%. So far, 20 central banks have eased policy in 2015. Including Euro area members, that is nearly 40 countries now with looser monetary conditions.
Yesterday’s retail sales data from a range of Euro-area countries including Germany were rather encouraging.
Denmark’s central bank sold DKK for DKK 168.7bn in February to defend the DKK peg to the EUR after January’s DKK 106bn intervention. As a result, Danish currency reserves rose to a staggering DKK 737bn (38% of GDP), a new all-time high. The recent behaviour of the central bank and weakening of the DKK suggest the bank might be done cutting rates for now.
Day ahead
Today the final Euro-area services and composite PMI prints will be the attention of the market in Europe. Euro-area retail sales might also get some attention.
Over in the US, the ADP employment print will help shape expectations ahead of Friday’s jobs report. The consensus forecast is a 220k rise after a 213k gain in January. In our view, however, ADP employment looks more like a lagging indicator of payrolls (see chart below). As well as this, the composite and services PMIs, ISM non-manufacturing and the Fed’s Beige Book will also be in focus.
Bank of Canada is generally expected to remain on hold at today’s policy meeting after the surprise 25 bp rate cut delivered in January.
The Polish central bank is expected to cut rates by 25 bp to 1.75%.
In Brazil, we expect the central bank to hike rates by 50 bp, taking the Selic target rate to 12.75%, in line with the consensus forecast.
Rates
Across the Euro area 10-year yields rose (excluding Greek yields) ranging from 1 bp to 8 bp depending on the proximity to Germany.
The surprise of the day was that Greece will get financing from the European Bank for Reconstruction and Development (EBRD). The aim is to help Greek private companies (SMEs) regain access to financing, and to promote regional economic integration.
This message clearly supported Greek yields which fell, but despite the positive tone Greek yields are still above the levels seen before the Greek elections on 25 January.
US yields rose with the 10-year rising 5 bp US yields very likely rose on the back of Actavis Plc selling USD 22bn of debt. Markets will for the rest of the week be waiting for Friday’s payrolls report.
FX
EUR/USD was struggling just below 1.12 yesterday, as the 2015 lows of 1.1098 attract. This was despite the better Euro-area data (stellar German retail sales yesterday). The most important factor for the EUR will be ECB’s Draghi acknowledging data improvements tomorrow: if so, EUR/USD still has a chance of bouncing back above 1.12.
EUR/SEK collapsed below the 200-day moving average yesterday (9.27), taking also the January lows, on the back of more positive comments from the Riksbank (expecting SEK strength). So now the cross is vulnerable to a further downside correction from a technical perspective, and if it continues down there is no support until 9.18. That said, the Riksbank remains the risk – as our economists still call an April rate cut.
The NOK was the loser yesterday, probably on some action, closing the NOK/SEK longs too. Oil prices remain glued to USD 60/bbl – not enough to keep the NOK strengthening. What does this price mean for the NOK? We will get an idea from the Q1 oil investment survey on Thursday, a key data release.