The Reserve Bank of Australia (RBA) will continue to remain on hold at Tuesday’s board meeting where the official cash rate will remain parked at 1.5 percent. Future markets have priced in only a 2 percent chance of a cut and no chance of a rise. The RBA has expressed an unwillingness to lower official interest rates further, given the financial stability risks associated with the housing market and high household debt levels.

The central bank also remains caught between underlying inflation that is below target and reaccelerating house prices. With economic growth under its potential and inflation below the target band, the RBA has left the door to an interest rate cut ajar. There are growing doubts about the ability of labour market growth to boost wages growth and inflation.

Capital city dwelling prices across Australia rose by 1.4 percent for the second consecutive month in March. Growth in house prices has outpaced that of unit prices over the year to March. Nationally house prices rose 13.4 percent, outpacing growth in unit prices of 9.8 percent.

The Australian Prudential Regulation Authority (APRA) has again tightened measures on investor lending, albeit rather lightly. The measures are designed to ensure financial stability and are likely to result in a slowing in investor activity and a moderation in house price growth, over time. If measures from APRA are successful in lowering financial stability risks, in time it could potentially lower the hurdle for an interest rate cut from the RBA.

Building approvals posted a strong increase in February, beating expectations of a decline. House prices were up strongly in March, yet again. Detached housing approvals were up 5.7 percent m/m, reversing two months of falls. The CoreLogic capital city house prices rose 12.9 percent y/y in March compared with 11.7 percent y/y in February. This is the strongest annual price growth since the first half of 2010. Data suggest house price growth has not yet peaked, despite the efforts of the regulators.

“RBA will leave its key rate unchanged tomorrow morning. Rising property prices are worrying the Australian central bankers but are unlikely to cause any measures any time soon,” said Commerzbank in a report.

AUD/USD is extending its three-day losing streak after the Aussie remains dented by worse-than-expected Australian retail sales data. The pair is currently holding strong trendline support at 0.76 levels. Technical indicators support downside, RSI and Stochs are biased lower. Price action has broken below 50-DMA and is on track to test 200-DMA at 0.7551.

European Bonds and Credit, spread tightening across the board

Yesterday saw some semi-core and peripheral spreads tightening pretty much across the board versus core EGBs, with especially PGBs putting in a strong performance, outperforming 10yr Bunds by more than 10bp. GGBs bucked the tightening trend after ECB’s Stournaras told Greek MPs that the bailout was at a “critical” stage, and that any future PSPP-eligibility of GGBs would be contingent on the completion of the bailout review and a legally binding agreement over specified medium-term debt relief measures (which doesn’t seem imminent to say the least).

A remarkable feature of yesterday’s price action was the further widening of Bund ASW spreads, with the futures-implied 10yr Bund ASW hitting 50bp. It now exceeds our estimate of fair value – which is based off 2s10s, BTP/Bund spreads, 6M Libor-repo spreads and implied volatility – by more than 10bp. ECB weekly data on PSPP showed that purchases slowed marginally to €16.9bn in the week ended 10 February from €17.3bn the week before.

Corporate and covered bond purchases also slowed, but the overall €20.1bn bought across all asset classes still leaves the ECB on track to buy more than €80bn in February. Today’s main event will be Fed Chair Yellen’s testimony to the Senate Banking Panel. If she want’s March to be a live meeting as other Fed officials have suggested it is, she will have to adopt a more hawkish tone beyond the usual reference to data dependency. Currently we calculate a market implied probability of around 17% for March rate hike. Supply. No EGB supply is scheduled for today.

In SSA space KfW has used this opportunity to announce the launch of a new 10yr KfW EUR benchmark. Wide Bund ASWs currently render the agency relatively cheap versus the sovereign. The KfW 3/26 which was launched last year currently trades at a pick-up of 30bp versus the DBR 2/26 – its widest level to date. We think these levels are starting to look attractive for switches into KfW. Not only do our models for the Bund ASW suggest that it is currently much too wide but we also think that the Bundesbank is at the point where it has to increasingly look into the option of sub-depo buying – and also agency- or regional bond alternatives to Bunds.

Eurozone factory growth hits six-year high in March as growth accelerates in Germany, Italy and France. IHS Markit’s final manufacturing Purchasing Managers’ Index for the eurozone rose to 56.2 in March, the highest since April 2011, from 55.4 in the previous month. The reading was in line with expectations.

An index measuring output, which feeds into a composite PMI due on Wednesday, rose to a near six-year high of 57.5 from 57.3. The flash estimate was 57.2. A sub-index measuring delivery times fell to 41.9 from 43.9, its lowest reading since May 2011. New orders surged despite prices charged rising faster than in any month since June 2011.

Factories across the euro zone struggled to keep up with demand last month. The survey is also signalling the highest incidence of supplier delivery delays for nearly six years. “These delays send warning signal about rising inflationary pressures, as busy suppliers are often able to hike prices,” said Chris Williamson, chief business economist at IHS Markit.

March saw eurozone manufacturing employment increase for the thirty-first consecutive month. Price pressures remained elevated at the end of the opening quarter. Manufacturers’ purchasing costs rose at a rate close to February’s 69-month high, leading to the steepest increase in factory gate selling prices since June 2011.

“Euro zone manufacturing is clearly enjoying a sweet spell as we move into spring, but it is also suffering growing pains in the form of supply delays and rising costs,” said Chris Williamson, chief business economist at IHS Markit.

When oil price bottomed around $27 per barrel last year in February, many predicted a major reversal and the dark days for producers to be over. Yet, more than a year after the bottom, the oil market is struggling to cope up with the supply glut and lack of clarity. A deal by OPEC and 11 participating non-OPEC countries to reduce production by 1.8 million barrels per day has failed to soothe the market concerns. Every day, contrasting forecasts continue to appear in the media suggesting a spike in oil price or a tumbling to the bottom once again. So, how can you know which side to take? We at FxWirePro believe (despite our guidance and forecasts) that readers should make up their own views (a must, even if they are trading on our calls) based on facts. Here are the key factors that one needs to watch to understand the market dynamics that might lay ahead,

US production has been recovering since it bottom in July last year. Though the country is producing lesser amount crude compared to the pre-oil-crush levels, production has increased by 719,000 barrels since July. The number of active oil rigs operating in the US has more than doubled since it bottomed around in May last year. It is currently at 662 and the production is at 9.147 million barrels per day.
OPEC deal is likely to serve as the most crucial factor to watch out for. On May 23rd, OPEC ministers are scheduled to meet at the Vienna headquarters to decide on the deal extension. Mark your calendars for that date. We expect the OPEC and participating non-OPEC countries to extend the current production cuts deal.
The level of inventories would also play a crucial role in price discovery. Declining inventories would invariantly result in a higher crude oil price. As of now, inventories in the US rests at 533 million barrels, the highest ever. Recently, the gasoline inventory has come down but still higher at 239 million barrels when compared to historical data. The OPEC deal has pushed the oil market to backwardation but the inventory is yet to come down significantly.
Demand has been growing at a rapid pace since 2016 thank to lower oil price and contribution from countries like India and China. But experts expect higher demand this year from the United States as record numbers of cars and trucks were sold during the winter and holiday season.
New projects would play a very significant role for future prices. Recently Goldman Sachs have warned that many projects adopted during the $100 per barrels crude oil are set to come online this year and in the next few and would lead to higher than expected production. On the other hand, International Energy Agency has warned that lower level of investments due to 2014 oil price crash and continued lower price would eventually lead to supply constrain and eventually higher oil price.
These five fundamentals would be crucial in determining oil price in the months and quarters to come. WTI is currently trading at $50.6 per barrel and Brent at $2.8 per barrel premium.

The betting market is underestimating the possibility of a Le Pen victory in the upcoming French election. The market is pricing 63-67 percent chance of an Emmanuel Macron presidency, compared to 22-25 percent chance for a Marine Le Pen victory. We think that is largely due to the polling. All the polls are predicting a Le Pen win in the first round on April 23rd and a Macron victory in the second round with a huge margin of 62-38 percent. Then, why do we think that possibility of a Le Pen win is mispriced? Here are some points to note,

In 2012 election, Front National Leader Marine Le Pen was not so much of dazzling political figure compared to the 2016 election and many people associated her with her father’s more extreme politics. Yet, she received almost 18 percent of the votes in the first round and came in third place.
More French are disgusted with establishment politics that they were during 2012 election.
The market is underestimating the commitments of Le Pen voters. While Polls show a Macron win, they also show that 95 percent of Le Pen supporters passionately back her compared to just 2/3rd for Mr. Macron. Le Pen voters are more likely to head to the polls to cast their votes than any other parties. Almost 37 percent of the French people are planning to abstain from this year’s election even if it helps Le Pen.
French people who are backing other candidates that the above two are more reluctant to back Macron or Le Pen in the second round.
According to Pew Research Center’s 2016 polls, 62 percent French have unfavorable views towards the European Union.
All polls indicate terrible performance by established parties like the incumbent President Francois Hollande’s Socialist party, which means that the anti-establishment wind is blowing strong and Mr. Macron is the establishment candidate among the duo.
Madame Le Pen is the only prominent female candidate in this year’s French election and that needs to be counted too.
We, expect the betting market to correct the odds sharply after the first round outcome. If le Pen secures 32-35 percent in the first round, it is more likely to be a Le Pen Presidency than not.

Spanish seasonally-adjusted retail sales remained unchanged in February, data from the National Statistics Institute (INE) showed on Friday. The unchanged reading compared to a revised 0.1 percent drop a month ago.

Data missed expectations for a 0.9 percent rise. January’s 0.1 percent drop which was revised from a previously reported growth of 0.1 percent marked the first time Spanish retail sales shrank after 29 straight months of expansion.

On an unadjusted basis, retail sales fell 3 percent annually, after decreasing 0.2 percent in January. Month-on-month, retail sales increased for the first time in three months. Sales gained 0.2 percent in February, reversing January’s 1.2 percent decrease. Food sales grew 0.3 percent, and non-food sales increased 1.1 percent in February.

Data from German Statistics office, Destatis showed Friday that Germany’s retail sales in February unexpectedly fell by real 2.1 percent year-on-year, reversing January’s revised 2.7 percent increase.

Meanwhile, month-on-month, Germany’s retail sales were up 1.8 percent after declining 1 percent in January. The monthly growth beat analysts’ forecasts for a 0.7 percent increase. A similar faster growth was last seen in August 2014.

Mixed data on Friday sent mixed signals about the health of this sector of Europe’s largest economy. A breakdown of the year-on-year data showed sharp drops in sales of food, drinks and tobacco as well as clothing, shoes and other items such as books and jewelry.

The volatile indicator is often subject to revision, the Federal Statistics Office said. The data follows GfK survey which showed German consumer sentiment unexpectedly fell to its lowest level in five months going into April, partly due to people’s concerns that rising inflation will erode their purchasing power.

The UK gilts remained subdued Friday as investors largely shrugged off lower-than-expected fourth quarter gross domestic product (GDP) and business investment data.

The yield on the benchmark 10-year gilts, which moves inversely to its price, jumped 1-1/2 basis points to 1.13 percent, the super-long 30-year bond yields climbed 1/2 basis point to 1.71 percent while the yield on the short-term 2-year traded nearly 1 basis points up at 0.11 percent by 09:10 GMT.

On a yearly basis, UK’s GDP climbed 1.9 percent in the fourth quarter instead of 2 percent expectations. In 2016, the economy expanded 1.8 percent as previously estimated, versus 2.2 percent in 2015.

Gross domestic product climbed 0.7 percent sequentially, unrevised from the second estimate released on February 22. The third quarter growth was revised down by 0.1 percentage point to 0.5 percent.

Further, in the fourth quarter, business investment dropped 0.9 percent to GBP43.5 billion, data from ONS showed today. Gross fixed capital formation increased by 0.1 percent to GBP78.1 billion in the fourth quarter.

The German bunds slid Friday, after reading wider-than-expected decline in the country’s unemployment rate during the month of March. Also, investors remain keen to watch the Eurozone’s March consumer price inflation, scheduled to be released shortly today.

The yield on the benchmark 10-year bond, which moves inversely to its price, rose 1 basis point to 0.34 percent, the long-term 15-year bond yields rose 1/2 basis point to 0.54 percent and the yield on the short-term 2-year bond traded 1 basis point higher at -0.73 percent by 08:20 GMT.

German unemployment unexpectedly dropped to a new record low in March as Europe’s largest economy powered ahead.

The jobless rate fell to 5.8 percent, from 5.9 percent, and the number of people out of work slid by a seasonally adjusted 30,000 to 2.6 million, data from the Federal Labor Agency in Nuremberg showed on Friday. Economists in a Bloomberg survey forecast no change in the unemployment rate and a 10,000 decline in the number of people seeking work.

“The job market continues to develop favourably. With the onset of spring activity, the number of unemployed people has declined, employment growth is continuing unabatedly, and demand for new employees continues to be high,” Bloomberg reported, citing Detlef Scheele, Board Member, German Labor agency.

The New Zealand bonds closed a tad higher at the time of closing, following a drop in the country’s business confidence. Also, investors are curiously eyeing the GlobalDairyTrade (GDT) price auction, scheduled to be held on April 5 for detailed direction in the debt market.

The yield on the benchmark 10-year bond, which moves inversely to its price, fell 1 basis point to 3.21 percent at the time of closing, the yield on 7-year note also slipped nearly 1 basis point to 2.80 percent and the yield on short-term 2-year note also traded 1 basis point lower at 2.16 percent.

New Zealand’s business confidence eased in March. However, other survey indicators remain fighting fit. Firms are optimistic about their own businesses, and still, want to hire and invest. The survey continues to point to solid growth.

The construction sector remains optimistic but showed a large backward step across some survey metrics. Inflation expectations continue to nudge up. Investment intentions eased from +22 to +21; that’s still a good tempo. Employment intentions are still pacing themselves. A net +23 are looking at hiring more staff, down 1 point. Profit expectations eased from +24 to +23, led lower by construction.

According to data released by the South African Reserve Bank (SARB) on Thursday South Africa’s money supply and private sector credit grew at weaker pace in February. M3 grew 6.63 percent year-on-year in February, slower than the 7.91 percent increase in the previous month. Money supply growth rate missed expectations to remain at 7.9 percent.

Private sector credit climbed 5.26 percent annually, following a 5.52 percent rise in January. The annual growth was also weaker than the expected 5.3 percent.

The South African Reserve Bank will announce the Monetary Policy Committee’s decision on repo rates at 1300 GMT and analysts largely expect the central bank will keep benchmark lending rates on hold at 7 percent at its policy announcement.

South Africa’s rand firmed against the dollar early on Thursday ahead of the central bank’s interest rates decision, but looked vulnerable to speculation of an imminent cabinet shake-up that could see Finance Minister Pravin Gordhan removed.

USD/ZAR was trading at 12.87 at around 1050 GMT, down 1.21 percent on the day. The pair hit near 3-week highs of 13.1578 on Wednesday’s trade. Momentum studies on daily charts are neutral and the pair is hovering around 20-DMA at 12.8715. A decisive close below could see further drag lower.

Energy • US crude oil inventories: Yesterday’s EIA report showed that US crude oil inventories increased by 867Mbbls over the last week, below the 2MMbbls stock build that the market was expecting. The lower-than-expected build was due to higher refinery throughput, which increased from 15.8MMbbls/d to 16.23MMbbls/d over the week. A higher refinery throughput rate and a decline in refined product inventories suggest strong demand currently. • Russia oil output cuts: According to reports, the Russian Energy Minister has said that the country has cut oil output by 200Mbbls/d so far, versus their agreed cut of 300Mbbls/d. However, the country expects to reach this target by the end of April. With regard to extending production cuts, Russia has said that it is too early to decide on whether an extension is needed.
Metals • Grasberg copper mine: Reports suggest that the Indonesian government and Freeport have finally completed discussions on converting the company’s current mining license to a new one. With Freeport apparently now agreeing to this new license, we should see Grasberg resume copper exports, while the mine is likely to ramp up operations once again. • Australian cyclone aftermath: Following the cyclone that hit Queensland, a number of coal mines in the state that were forced to shut are now looking to restart mining operations. However, currently, ports and rail lines remain shut. The scale of damage to infrastructure is still unknown.
Agriculture • Ivory coast cocoa export tax: There are reports that the Ivorian government is considering cutting the export duty on cocoa, from the current 22%. This comes at a time when Ivory Coast has seen a rebound in domestic production, evident through higher port arrival data. A lower duty does potentially mean increased exports from the country. • Brazilian robusta coffee imports: It appears that the government is close to deciding to allow the importation of up to 1m bags of robusta for re-export. Imports were initially approved, but this led to protests from coffee growers, which prompted the president to quickly reverse the decision.

The ECB is not anywhere near the exit of its expansionary monetary strategy as highlighted by a report suggesting that the ECB has been concerned by the recent rise of EMU bond yields. In particular, higher yields in EMU peripheral bonds seem unwelcome, in line with our own view suggesting that within the ‘rule-like’, one-rate-fits-all monetary union with little fiscal integration, it is the credit risk driving monetary conditions. Effectively, diverging credit risks have loosened monetary conditions in Germany and tightened conditions in Italy. The weakening Italian credit suggests the ECB may lean its monetary strategy to accommodate Italy, hoping that the resulting monetary boom in EMU’s low credit risk countries spills over into the periphery.

Yesterday’s report released by Reuters specifically cited the tweak in the ECB interest rate statement axing a reference to being ready to ‘act with all available instruments’. The ECB wanted to hint that tail risks have eased, but it did not want to signal that it is heading towards the exit. EURUSD topped near 1.0906 last week ahead of our 1.0925 key resistance level now facing the risk of breaking lower testing the 1.05/04 support. Note, bullish EUR recommendations have swamped the marketplace over recent weeks, and our positioning tracker shows EUR positioning is now long, suggesting de-positioning activity putting EURUSD under additional selling pressure.

The Fed should continue hiking rates over the course of this year with the debate within the FOMC leaning either towards three or four rates hikes for this year. Comments by Fed’s Williams and Rosengren (non-voters) put this projected rate hike path in the context of current US economic momentum and not based on the prospect of additional policy stimulus by the new US administration. The ‘Trump fade’ would be a big issue if the US economy were to still deploy a large output gap. US consumer confidence has reached levels last seen in the late 90s when James Rubin, the inventor of the ‘strong USD’ mantra, was Treasury Secretary, and the labour market has shown increasing signs of tightness. Interestingly, booming US economic data stand against low and falling Presidential popularity rates. Normally, political and economic support move hand in hand. Their divergence may provide another indication that the output gap-closing US economy has developed ‘animal spirits’ which may no longer need political encouragement.

Meanwhile, the CPI-adjusted US 10-year yield has declined to -0.3%,now running at a similar level witnessed in Japan which is experiencing a 20-year deflation history. We ascribe the low reading of the US real yield to the new ‘availability of capital’ driven by US banks pushing their assets into higher yielding environments. Excess of bank capital and better balance sheet structure allow US banks to deploy a higher VaR. Banks with USD deposits bought short-term JGBs and swapped them back into USD, securing the basis spread as a profit. Japanese investors buying US Treasuries and increasing FX hedges helped US bond yields and the USD to move lower, allowing US real yields to fall against the strong economic uptrend.

The ECB apparently concluded that enough was enough and yesterday stepped up its verbal intervention campaign to correct overdone market expectations for a ECB depo rate hike adjustment. Following the news story in which unnamed ECB sources were quoted as saying that the message of the March press conference was “way overinterpreted” by markets the Bund future jumped 40 ticks, while the ECB dated EONIA forward curve bull flattened. The 10yr Bund yield eventually closed at 0.34%, near the middle of the 0.15%-0.50% range that we continue to foresee up until the second round of the French presidential elections. What is more, we still feel that the ECB dated EONIA forward for Dec-17, at -0.30%, is pricing in a too high probability of a 10bp depo rate hike.

In an interview with CNBC yesterday, the vice-chair of the US Federal Reserve said that the Fed’s March projections that forecast two more hikes in 2017, is about right. He stressed that it’s is his forecast as well. In the December 2016 meeting, the Fed projected three rate hikes for 2017 and in March they delivered one while projecting two more for the year. He expects the economy to continue to perform and the inflation to reach the 2 percent goal gradually.

With regard to the fiscal policy promises of the new administration, Mr. Fischer said that last week’s failure of the congress to pass the healthcare bill may have changed his internal calculus but not the overall outlook. He said that the central bank is closely monitoring the fiscal negotiations without prejudging the outcome. He partially blamed lower productivity for hindrance to growth but added that the reasons limiting the productivity growth aren’t fully understood. He expressed his concern with protectionism as he feels that greater global integration since World War II has benefited the US and other nations as well.

Our previous dashboard focusing on the March meeting correctly predicted the outcome including Kashkari dissent, now, our new dashboard will be focusing on the June meeting and it looks like below,

Doves: Neel Kashkari
Hawks: Charles Evans, Patrick Harker, Stanley Fisher and Robert Kaplan.
Unknown: Janet Yellen, William Dudley, and Lael Brainard
Pls. note that Daniel Tarrullo has resigned and the position is yet to be filled. He voted at the March meeting.

The Socialist candidate in this year’s French election, Manuel Valls, the former Prime Minister of France has abandoned his candidacy and instead, he would vote for the independent centrist candidate Emmanuel Macron in order to defeat their staunch rival Front National leader Marine Le Pen. He said on the French television that the Socialist candidate Benoit Hamon is not in the best position to prevent the rise of the dreaded far-right candidate. Mr. Hamon is expected to come fifth in the first round of the election, which will be held on April 23rd. he said that he is not going to take any risk. The incumbent socialist President Francois Hollande is not running for a second term, largely because of his very low approval rating among the French. At one point, his approval rating dropped to just 4 percent. He said repeatedly that as a President it is his primary goal to prevent a Le Pen Presidency as that will not be in the best interest of his country. So far, some 50 lawmakers have also jumped to Macron’s boat in order to prevent Le Pen from getting into the second round.

Polls have so far shown that Marine Le Pen getting beaten by Macron in the second round by a large margin of more than 30 percent despite winning the first. But polls have been proven wrong many a time in 2016. The establishment politicians are very scared as the Le Pen Presidency would not only mean the end of their world but the end of the European union and the Euro.

The Japanese government bonds remained mixed Wednesday as investors remain keen to watch the country’s February consumer price inflation as well as industrial production data, scheduled to be released on March 31.

The benchmark 10-year bond yield, which moves inversely to its price, fell 1 basis point to 0.06 percent, while the long-term 30-year bond yields rose nearly 1 basis point to 0.82 percent and the yield on the short-term 3-year note traded flat at -0.18 percent by 06:30 GMT.

Further, trading volumes were low as investors remained reluctant to stake out positions ahead of the looming March 31 domestic fiscal year-end. However, JGB futures did manage to eke out modest gains following the slump in Tokyo stocks as risk sentiment was hurt by Trump’s setback.

Lastly, markets will now be focusing on the February consumer price inflation data, scheduled to be released on March 31 for detailed direction in the debt market.

The Australian bonds rebounded Thursday as investors await to watch the country’s retail sales during the month of February as well as the Reserve Bank of Australia’s (RBA) monetary policy decision, scheduled to be held next week.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, slumped 3-1/2 basis points to 2.70 percent, the yield on 15-year note also plunged 3-1/2 basis points to 3.08 percent and the yield on short-term 2-year also traded 1 basis point lower at 1.75 percent by 04:40 GMT.

After three straight weeks of falls, consumer confidence rose 1.6 percent in the week ending March 26. The four week average continued to fall, however, and is now back to early 2016 levels and close to its long run average.

The pickup in confidence was broadly based with four out five sub-indices posting gains. Households’ views of the 12-month economic outlook rose 2.7 percent last week, after a 3.3 percent fall the previous week. Consumers were also more confident regarding future economic conditions, with the index rising a solid 2.8 percent.

The German bunds remained narrowly mixed Wednesday as investors await the country’s unemployment rate and the consumer price inflation, during the month of March, scheduled to be released March 30 and 31 respectively.

The yield on the benchmark 10-year bond, which moves inversely to its price, jumped nearly 2 basis points to 0.38 percent, the long-term 30-year bond yields traded nearly flat at 1.13 percent while the yield on short-term 3-year bond traded 1 basis point lower at -0.59 percent by 08:30 GMT.

Germany’s inflation accelerated as estimated in February, final data from Destatis showed Tuesday. The consumer price index inflation rose to 2.2 percent from 1.9 percent in January. The rate came in line with the flash estimate published on March 1.

The latest inflation figure was the highest since August 2012, when it was the same. A higher figure of 2.4 percent was seen in November 2011. Compared to the previous month, the CPI rose 0.6 percent in February as estimated, offsetting January’s 0.6 percent decline.

The British Prime Minister Theresa May has signed the Brexit letter to invoke the Article 50 of the Lisbon Treaty last evening and the letter is on its way to Brussels to the President of the European Council Donald Tusk. The official Article 50 exit process is due to begin on Wednesday after 1:30 pm Brussels time (11:30 am GMT), when the Britain’s Ambassador to the EU, Tim Borrow is expected to hand over the letter to the Council President Donald Tusk.

While both sides have agreed to cooperate with each other, Prime Minister May has cleared that she is ready to walk out without a deal if an agreeable one can’t be reached. The EU, on the other hand, has said that it doesn’t want to punish the UK over Brexit but a new deal would be an inferior one compared to the full membership. Mrs. May has also indicated that she plans to take back the immigration control from Brussels as well as jurisdiction away from the European Court of Justice. However, reports are coming out that the UK government might soften its rigid stance on the matter.

The talk is likely to start in troubled waters as the European Union is planning to hand over Britain an exit bill amounting to as much as €60 billion. According to the Article 50, the current relation between the UK government and the EU would cease to exist after two years from the date of the triggering if the timeline is not extended by a unanimous voting by the member countries.

The Australian bonds slumped Wednesday, tracking softness in the U.S. counterpart. Also, broad gains in equities led to the slide in the country’s money market.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, jumped 3 basis points to 2.74 percent, the yield on 15-year note also climbed a little over 2-1/2 basis points to 3.12 percent and the yield on short-term 2-year also traded 1 basis point higher at 1.76 percent by 04:30 GMT.

After three straight weeks of falls, consumer confidence rose 1.6 percent in the week ending March 26. The four week average continued to fall, however, and is now back to early 2016 levels and close to its long run average.

The pickup in confidence was broadly based with four out five sub-indices posting gains. Households’ views of the 12-month economic outlook rose 2.7 percent last week, after a 3.3 percent fall the previous week. Consumers were also more confident regarding future economic conditions, with the index rising a solid 2.8 percent.

In a setback to the British Prime Minister Theresa May’s government, the regional parliament in Scotland backed Scottish first minister Nicola Sturgeon’s demand for a second referendum. The members of the Scottish Parliament (MSPs) voted 69 to 59 to seek permission to hold another independence referendum. Now, the first minister would try to ensure that the UK government grants one. She has said that she won’t back down even if the Prime Minister doesn’t answer the call. She said, “The mandate for a referendum is beyond question. It would be democratically indefensible to attempt to stand in the way.” She would make a formal request to the UK government to grant her powers to hold a second referendum. In the previous referendum that was held in 2014 under the then Scottish first minister Alex Salmond, the Scottish people rejected independence with 55-45 percent. Since then there has been no indication in the polls that the Scottish people would back independence in a second one. However, Nicola Sturgeon argues that at that time, staying inside the EU was shown as a hanging fruit by those opposing the independence and that changed with the Brexit referendum last year.

Despite this passing, the UK government is standing firm that it would not support a referendum until the Brexit is complete and the final deal between the UK and the EU is clear.

The Japanese government bonds traded mixed Tuesday as investors remain keen to watch the country’s February retail sales as well as consumer price inflation data, scheduled to be released on March 29 and 31 respectively.

The benchmark 10-year bond yield, which moves inversely to its price, rose 1 basis point to 0.06 percent, while the long-term 30-year bond yields fell nearly 1 basis point to 0.83 percent and the yield on the short-term 2-year note traded flat at -0.25 percent by 06:00 GMT.

Further, trading volumes were low as investors remained reluctant to stake out positions ahead of the looming March 31 domestic fiscal year-end. However, JGB futures did manage to eke out modest gains following the slump in Tokyo stocks as risk sentiment was hurt by Trump’s setback.

Lastly, markets will now be focusing on the February consumer price inflation data, scheduled to be released on March 31 for detailed direction in the debt market.

The People’s Bank of China (PBoC) is expected to raise the money market rates again, if needed, while keeping the benchmark interest rate unchanged.

The central bank will maintain medium- and long- term funding costs appropriate to shore up the economy through unconventional monetary policy tools such as the MLF and PSL. Further, the PBoC is likely to tighten controls on cross-border outflows, while further opening up domestic capital markets to attract capital inflows, Scotiabank reported.

China will prioritize economic, financial and social stability ahead of a twice-a-decade leadership reshuffle at the 19th CPC National Congress due to be held in November. China’s top leadership has committed to seeking progress while maintaining stability.

Offshore yuan funding costs are expected to soar again as long as the depreciation pressure on the yuan intensifies in the future, which will help alleviate market concerns and stabilize the yuan exchange rate.

Meanwhile, China’s equities and bonds will finally be included in global benchmark indices.

The pace of credit growth to households and businesses in the Eurozone edged lower in February, data from the European Central Bank showed Monday. The broad money measure, M3, rose 4.7 percent year-over-year in February, slower than the 4.8 percent climb in January, missing expectations for a 4.9 percent rise. The Eurozone money supply growth eased for the second straight month in February.

Within M3, the annual growth rate of deposits placed by households stood at 5.4 percent in February, down from 5.5 percent in January. While, deposits placed by non-monetary financial corporations registered a decline of 2.0 percent.

The ECB has maintained an ultra-loose monetary policy with low interest rates and stimulus measures which have helped bolster credit growth in the Eurozone over the last two years. The narrower aggregate M1, which includes currency in circulation and overnight deposits, remained unchanged at 8.4 percent in February.

Details of the report showed that the annual growth rate of total credit to euro area residents decreased to 4.3 percent in February from 4.6 percent in the previous month. The yearly growth rate of credit to general government moderated to 9.8 from 10.5 percent.

European Central Bank (ECB) executive board member Sabine Lautenschlaeger speaking on regulation and Brexit told a press conference on Monday that the central bank is prepared for any outcome from Brexit talks.

Lautenschlaeger said that there may probably be many banking groups coming in due to Brexit and to enable banks to comprehensively comply with requirements, ECB will grant bank-specific phase-in periods. She added that such periods can last months, possibly years, depending on individual circumstances.

Lautenschlaeger called for Basel -3 regulations to be finalized as quickly as possible and added that the committee is close to reaching an agreement.

Rotation from high yield into emerging markets is in evidence, on HY outflows versus EM inflows. Investment grade space sees a different rotation from government funds into corporate funds, with in particular large chunks of cash going into front end corporate funds of late. At the same time, long end government funds have seen resumed inflows, which should help to cover some duration shorts, leaving aggregate positioning more balanced (bearish).
Seven things learnt from latest flows data
1) There is evidence of rotation out of high yield space into emerging markets, as the latter continue to see steady cash inflows. No evidence of EM re-think as of yet.
2) Emerging markets hard currency funds have been the largest recipient of new money, and local currency funds have seen significantly more inflows than blend funds.
3) Some centres that had seen reduced investor allocations are now seeing a re-build in allocation, with for example Turkey and Mexico now seeing increased allocations
4) High yield inflows in the past couple of months have correlated with the risk-on theme seen in equity markets, and the recent pull back in equities is consistent with the maintenance of that generic correlation.
5) Valuation effects rationalise the recent rotation from high yield into emerging markets, whereas prior W Europe high yield outflows were more reflective of evidence of deceleration of issuance volumes.
6) Rotation from peripheral Eurozone government paper into corporates continues as evidenced from flows. The biggest of the corporate inflows have been into front end funds, which acts as something akin to “a front end haven with a spread”. 7) Government funds continue to see outflows, but there have been some reverse inflows to long end government funds in the past quarter. We read this as evidence of short covering, which should see positioning becoming more balanced ahead.

EM staying in strong demand. Despite easing commodity prices (Dalian iron ore futures sliding 6% to an 11-week low, rebar futures off by 4%, oil turning lower despite OPEC recommending extension of oil output cut, Baker Hughes US rig count rising to 652showing the 10th successive gain), EM currencies should remain in demand. Friday did see Colombia cutting rates by 25bp to 7%, with easing inflation rates providing monetary easing potential and China reported Jan-Feb industrial profits surging 31.5%Y due to faster growth in prices of coal, steel and crude. The spread between DM and EM inflation has fallen to its lowest level in 20 years, catapulting EM real rates higher. It is the EM supportive real rate differential keeping EM currencies supported despite currently falling commodity prices. In addition, declining foreign funding needs have reduced EM’s vulnerability should international funding costs rise. However, US long end bond yields have come off, pushed lower by investors scaling back on hopes of an early and aggressive US tax reform increasing US capital demand. Adding to the US yield downside pressure has been the sharp decline of USD funding costs signaled by USDJPY 3m cross currency basis tightening by 68bp from its November highs. Declining USD hedging costs have increased the attractiveness of investing into currency-hedged USD-denominated bond holdings for foreign investors, adding to the yield downward pressure.

Are investors right to be questioning Trump tax reforms? Maybe not Following a failed last-ditch attempt to secure backing, House Leaders opted to save face by pulling the vote on the GOP healthcare bill late on Friday. While the failure to repeal Obamacare has limited fiscal implications, investors are viewing this setback as a more broader loss of faith in the Trump administration’s ability to deliver on other campaign pledges – namely tax and spending policies which have underpinned risky asset prices since the US elections. Initial noise from the White House suggests that pushing through tax reforms will be the next order of business and in principle, this speculation alone could provide a backstop to the waning US reflation trade. But passing a tax bill will not be easy by any stretch of the imagination; GOP conservatives will want to ensure the package is close to revenue neutral, while any bipartisan deal would surely have to see the Trump team concede on concepts such as a border tax. Either way, a deflated $ will be looking for any glimpses of fiscal support this week and we would expect interest from $ bulls to increase as excessive negative expectations surrounding Trump tax reforms begin to tail off. One thing’s for sure, we don’t expect this EM “sweet spot” to last under the status quo; diminishing US growth expectations will weigh on global risk appetite and this spells bad news for EM assets in general. Watch for turning points in EM FX – in particular recent outperformers KRW and ZAR.

EZ focus will be on the flash Mar CPI estimate (Fri); our economists are looking for above consensus headline and core readings (the latter picking up to 1.0%), which could fuel the current hawkish ECB sentiment in markets. Investors might also be wise to keep an eye on the number of ECB speakers on show this week. Look for any EUR/USD clear out to be limited to the 1.0930-1.0940 for now.

Prime Minister Theresa May is set to trigger Article 50 this week (Wed); while we prefer to view this as more of a symbolic event – with nothing fundamentally changing in the UK’s economic outlook – markets will be looking for any clues to determine whether we’re on course for a soft or hard Brexit. For this, we place a greater focus on the initial response from Brussels – to be delivered by Donald Tusk within 48 hours – which could shed further light on the EU’s negotiating stance and priorities. Current GBP levels are not in our view pricing in the tail risk of a ‘cliff-edge’ Brexit – an automatic default to WTO rules – especially given talk from both sides in recent months over the need for a transition deal. Should EU leaders place greater weight on factors like the Divorce Bill – and demote the need for a smooth transition – then we would expect GBP to react negatively. We do see greater two-way GBP risk around this week’s Article 50 proceedings given the recent BoE-fuelled short squeeze and cleaner GBP positioning. With the two-year clock to strike a deal officially ticking, any initial political stalemate – or anything that pushes us closer towards a cliff-edge Brexit – may tip GBP/USD under the 1.20 level in the near-term and cautious real money investors may view this week’s events as a prompt to hedge for such an eventuality.

The Australian bonds sharply rebounded on the first trading day of the week Monday as investors poured into safe-haven assets tracking firmness in U.S. Treasuries amid losses in riskier equities and oil. Also, the lower-than-expected reading of the latter’s manufacturing PMI added to the upside sentiment.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, slumped 6-1/2 basis points to 2.70 percent, the yield on 15-year note plunged nearly 7 basis points to 3.10 percent and the yield on short-term 2-year traded 5 basis points lower at 1.73 percent by 03:50 GMT.

The seasonally adjusted Markit Flash U.S. Composite PMI Output Index registered 53.2 in March, to remain above the 50.0 no-change value for the thirteenth consecutive month. However, the latest reading was down from 54.1 in February and signalled the slowest expansion of private sector output since September 2016.

Further, At 53.4, down from 54.2 in February, the headline seasonally adjusted Markit Flash U.S. Manufacturing Purchasing Managers’ Index (PMI) signalled the slowest overall upturn in business conditions since October 2016.

The Reserve Bank of India (RBI) is expected to maintain status quo throughout this year, keeping the repurchase rate steady at 6.25 percent in 2017. However, beyond this year, the next move is likely to be a rate hike rather than a cut as the RBI policy committee remains keen to maintain price stability.

Apart from domestic considerations, the RBI will also keep an eye on global developments, especially the direction of US Fed policy. Further compression in the US and Indian long term rates, coupled with US dollar strength could induce volatility in the financial markets. Stability, therefore, will be a priority for the RBI, prompting a status quo stance on rates, DBS Bank reported in its latest research publication.

The central bank surprised on two counts in February. Benchmark rates were left unchanged in contrast to expectations for a cut. The policy stance was also shifted to a neutral bias from accommodative earlier, pulling the brakes on the easing cycle that started in early 2015.

“Under the flexible inflation targeting regime within +/-2 percent of the mid-point of 4.0 percent, the RBI will not be required to hike immediately in case of an overshoot. Nonetheless, the rate bias is tilted more towards hikes than cuts going forward,” the report said.

After the new healthcare bill that was supposed to replace the current bill, which is popularly known as the ‘Obama-care’ failed to pass through the congress last week, the relation between the US President Donald Trump and the House majority leader Paul Ryan has probably taken a turn for the worse. The new bill was expected to be put to voting on the House on last Thursday, a day marked by the seventh anniversary of the old bill. But the voting was initially postponed to Friday and then it was again canceled on Friday. As the opposition and the media targets ‘dealmaker’ Donald Trump for this failure, President Trump has allegedly showered his anger and frustrations towards Paul Ryan.

On March 25th, President Trump tweeted, “Watch @JudgeJeanine on @FoxNews tonight at 9:00 P.M.” He usually endorses shows via his tweeter account whenever he is either due to appear or appeared already in a show but in this one he wasn’t there. Instead, it was all about criticism against the Republican Party for failing to pass the new health care bill. In that show, Judge Jeanine Pirro called for the resignation of Paul Ryan from his post as the House leader.

A rift between Paul Ryan and Donald Trump is not a new phenomenon. There were clashes many a time during the campaign but after the election, they were getting along well and a rift between the White House and congress will be in nobody’s interest. Trump has also taken a jab towards congressional freedom caucus which remains allegedly behind the failure.

The Japanese government bonds remained flat in mild trading session Monday, following a slight global rout as concerns mounted over the United States President Donald Trump’s inability to overhaul the US healthcare system.

The benchmark 10-year bond yield, which moves inversely to its price, hovered around 0.05 percent, the long-term 30-year bond yields also remained flat at 0.83 percent and the yield on the short-term 2-year note also remained relatively unchanged at -0.25 percent by 06:40 GMT.

Further, Trading volumes were low as investors remained reluctant to stake out positions ahead of the looming March 31 domestic fiscal year-end. However, JGB futures did manage to eke out modest gains following the slump in Tokyo stocks as risk sentiment was hurt by Trump’s setback.

Lastly, markets will now be focusing on the February consumer price inflation data, scheduled to be released on March 31 for detailed direction in the debt market.

Last week, a couple of investment banks have scrapped their 2017 euro-dollar parity call. Citigroup called off its euro-dollar parity call saying that it no longer expects a big rally in the US dollar, which could push it to parity with the euro. The bank now expects the euro to decline to 1.04 against the dollar, revised from its previous forecast of 98 cents on the dollar. The euro is currently trading at 1.086 against the dollar and the bank suggests that it could jump to as high as 1.10 against the dollar over the next three months in the Front National candidate Marine Le pen gets beaten in the upcoming French election.

After Citi, it was Barclays. In a report on last Thursday scrapped the euro-dollar parity call noting that investors are breathing a sigh of relief after the Dutch election, where the euro-skeptic PVV party led by Geert Wilders failed to secure the top position. The bank is now forecasting the euro to reach 1.09 against the dollar in the second quarter of 2017 and drop to as low as 1.03 against the dollar in the fourth quarter and rebound to 1.05 against the dollar in early 2018. The bank now only sees modest US dollar appreciation likely to peak in the fourth quarter. The bank said in its report, “The cyclical advantage of the dollar might erode as more robust global growth and inflation materialize, while sideways moves appear more likely without a significant policy boost that shocks rates and equity risk premia higher. The path for the dollar is subject to uncertainty in fiscal and trade policies, which could lead to vastly different outcomes.”

The strength of the US dollar has recently come under strain as the financial markets pose doubts on the ability of the White House to pass its promises, the hope of which boosted the performance of the dollar since the US election.

Our euro-dollar parity call still remains active, which were given out at then exchange rate of 1.11 against the dollar. We have not scrapped it yet but closely monitoring the fundamental changes.

The EUR/PLN currency pair is expected to gradually edge higher towards a level of 4.35 in the coming quarter, following the National Bank of Poland’s relaxed monetary policy stance. The zloty appreciated in recent months, even outperforming peers such as the Hungarian forint, despite notable adverse political developments, Commerzbank reported.

Among recent developments, there was the awkward situation recently surrounding the PiS government’s opposition to the re-nomination of Donald Tusk for European Council President, and deterioration of EU relations as a result, when even allies, Hungary and the UK, voted against Poland.

Secondly, the Constitutional Tribunal probe is ongoing and could re-escalate at any time; this week, European Commission Vice-President Frans Timmermans remarked that the Polish government’s response to EC recommendations has been unacceptable — it could easily have triggered the use of the so-called Article 7 sanctions (which could strip Poland of its EU vote).

But, despite calls on him to activate this clause, Timmermans is resisting because of other political re-occupations in EU. Finally, the PO opposition has called for a vote of no confidence in the PiS cabinet and PM Beata Szydlo which will be held around April 5-7. Ruling PiS will be able to win the vote in the Parliament, no problem, but this is not to gloss over the fact that PiS’ approval ratings are no longer rising.

In fact, polls express greater public confidence in PO’s ability for foreign policy. All said, the zloty has remained unaffected, which probably reflects some kind of market ‘fatigue’ after constant debate and discussions of Polish political risks over the previous year, which ultimately led to nothing significant, the report added.

The final crucial election in the European continent will take place in Germany on September 24th. Incumbent German Chancellor Angela Merkel is hoping to become Germany’s longest serving chancellor by winning the fourth term as chancellor in September’s election. She herself has acknowledged that this year’s re-election is likely to the toughest she has faced since her first election as chancellor. Some of the polls suggest that she could be losing to her coalition partner’s candidate Martin Schultz could beat her to become the next chancellor of Germany. Also, the anti-establishment right wing party, Alternative for Germany (AfD) is set to enter parliament for the first time since its founding in 2013. They might become the third largest party in the general election.

However, the recent regional election in Saarland, Merkel’s CDU has received a major boost and it was the biggest setback for Mr. Schultz so far. Mrs. Merkel’s Christian Democratic Union (CDU) secured 40.7 percent of all votes, an increase of 5.5 percent compared to the previous election. Mr. Schultz, who campaigned vigorously in this local election, received 29.6 percent of all votes, down from 30.4 percent in the previous election. The left party received 12.9 percent of all votes, while Germany’s newcomer Alternative for Germany (AfD) received 6.2 percent of the votes.

This election result demands anyone, who has been discounting Merkel’s win in September based on polls should have a second thought.

The German bunds bounced on the first trading day of the week after investors largely shrugged off higher-than-expected Ifo business climate index. Also, market participants are eyeing the European Central Bank (ECB) member Peter Praet’s speech, scheduled to be held on March 28 for further limelight in the debt market.

The yield on the benchmark 10-year bond, which moves inversely to its price, slumped nearly 3-1/2 basis points to 0.38 percent, the long-term 30-year bond yields plunged nearly 4 basis points to 1.11 percent and the yield on the short-term 3-year bond traded 1 basis point lower at -0.62 percent by 08:40 GMT.

German business morale brightened unexpectedly in March, a survey showed today, suggesting company executives in Europe’s largest economy are brushing off concerns about the threat of rising protectionism. The Munich-based Ifo economic institute said its business climate index rose to 112.3 from an upwardly revised reading of 111.1 in February.

“The political uncertainties don’t affect the German economy,” Reuters reported, citing Klaus Wohlrabe, Economist, Ifo, when asked about the policies of U.S. President Donald Trump, Britain’s decision to leave the European Union and the ongoing instability in Turkey.

Lastly, traders also remain skewed to watch the release of Germany’s and Eurozone’s consumer price inflation and the former’s labor market report, scheduled for later in the week.

The CBR meets to set interest rates today. Our team in Moscow look for a ‘dovish hold’ today as do a majority of participants, although there are a few analysts looking for a 25bp or even a 50bp cut. The arguments for a cut are that CPI is falling slightly quicker than expectations and the CBR has started to sound a little more dovish. This year we do see 150bp of rate cuts, taking the policy rate to 8.50%, but see the 50bp per quarter cuts starting in 2Q. Given recent strong flows into EM debt product, we doubt a surprise cut would impact the RUB too severely and 10 year OFZs might have a chance to break under 8%. Equally an on hold outcome is unlikely to alter market expectations much. Expect RUB to stay relatively supported, especially with large tax deadlines due early next week. We tend to favour a USD/RUB move to 56.50/57.00 short term.

Centrists at the ECB are continuing to downplay the prospects of early tightening, although markets continue to price a hike in Sep 18. Understandably the ECB is concerned that markets will overshoot on any early hint of early tightening. Look out for Eurozone PMIs today. These have been running strong and suggest Eurozone growth may be running at 2%. We’re still clinging to the view that the 1.0850 area is the top of the EUR/USD range, but that could be severely tested if the US healthcare bill fails in the House today.

Data from Statistics South Africa showed on Wednesday that the nation’s headline consumer inflation slowed to 6.3 percent year-on-year in February from 6.6 percent in the previous month, matching consensus estimate in a Reuters poll. This was the weakest inflation reading since September 2016, when prices had risen 6.1 percent.

On a month-on-month basis, inflation rose to 1.1 percent from 0.6 percent previously. The month-on-month rise missed expectations at 1.2 percent. Core inflation which excludes the prices of food, non-alcoholic beverages, petrol and energy, inched lower to 5.2 percent year-on-year in February from 5.5 percent and rose to 1.1 percent on a month-on-month basis from 0.3 percent.

Separate data from South Africa’s Reserve Bank on Wednesday showed South Africa’s current account deficit narrowed to 1.7 percent of GDP in the fourth quarter of 2016. The reading was the lowest shortfall in nearly six years, and compared to a revised deficit of 3.8 percent in the third quarter.

Analysts had expected a 3.5 percent deficit for the quarter. For the year as a whole, the current account deficit narrowed to 3.3 percent of GDP from 4.4 percent in 2015.

The New Zealand bonds closed modestly higher Thursday after the Reserve Bank of New Zealand (RBNZ) maintained a neutral policy stance at its monetary policy decision, held earlier today.

The yield on the benchmark 10-year bond, which moves inversely to its price closed flat at 3.25 percent, the yield on 7-year note slipped nearly 1 basis point to 2.82 percent while the yield on short-term 2-year note traded 1/2 basis points higher at 2.12 percent.

The RBNZ left the Official Cash Rate (OCR) unchanged at 1.75 percent today, as was widely expected. Overall, there was little in the accompanying statement to suggest any shift in the RBNZ’s thinking, relative to the February Monetary Policy Statement and the Governor Graeme Wheeler’s speech in early March.

The bottom line is that the RBNZ expects the cash rate to remain low for a considerable period (the forecasts published in February suggested no change until late 2018). The outlook for the New Zealand economy remains positive, but the risks around the global environment are seen to the downside.

“We agree with the RBNZ that the OCR will remain on hold for some time. We have pencilled in two OCR increases in the first half of 2019, but the way we’d describe this more generally is that the first rate hike is too far away to be precise about the timing,” Westpac commented in its latest research report.

The Australian bonds snapped rally on the last trading day of the week, tracking weakness in the U.S. counterpart and as investors poured into riskier assets, including equities and crude oil. Also, upbeat retail sales data from the U.S. offset the rise in its initial jobless claims, lending further weakness in safe-haven assets.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, rose 1 basis point to 2.77 percent, the yield on 15-year note also climbed 1 basis point to 3.17 percent and the yield on short-term 2-year traded 1/2 basis point higher at 1.78 percent by 05:00 GMT.

Investors unwound carry trades while watching to see whether the President Trump can push through a healthcare bill, as failure could signal problems to come pursuing his economic agenda. Financial markets’ immediate focus is on whether Trump can gather enough support at a vote later in the day to rollback Obamacare, one of his key campaign pledges.

Further, market participants remain worried that if the White House fails at this hurdle, progress on fiscal stimulus and tax cuts might be derailed. The jitters have hurt risk sentiment globally and undermined commodity prices, which is bad for Australia.

Data from Statistics South Africa showed on Wednesday that the nation’s headline consumer inflation slowed to 6.3 percent year-on-year in February from 6.6 percent in the previous month, matching consensus estimate in a Reuters poll. This was the weakest inflation reading since September 2016, when prices had risen 6.1 percent.

On a month-on-month basis, inflation rose to 1.1 percent from 0.6 percent previously. The month-on-month rise missed expectations at 1.2 percent. Core inflation which excludes the prices of food, non-alcoholic beverages, petrol and energy, inched lower to 5.2 percent year-on-year in February from 5.5 percent and rose to 1.1 percent on a month-on-month basis from 0.3 percent.

Separate data from South Africa’s Reserve Bank on Wednesday showed South Africa’s current account deficit narrowed to 1.7 percent of GDP in the fourth quarter of 2016. The reading was the lowest shortfall in nearly six years, and compared to a revised deficit of 3.8 percent in the third quarter.

Analysts had expected a 3.5 percent deficit for the quarter. For the year as a whole, the current account deficit narrowed to 3.3 percent of GDP from 4.4 percent in 2015.

German bunds trade higher ahead of ECB member lautenschlaeger’s speech, March manufacturing PMI
The German bunds trade higher Thursday as investors wait to watch the European Central Bank member Lautenschlaeger’s speech, scheduled for later in the day. Also, market participants remain keen to read the March manufacturing PMI, due on March 24, which will remain crucial in determining the future direction of the bond market.

The yield on the benchmark 10-year bond, which moves inversely to its price, slumped 1-1/2 basis points to 0.39 percent, the long-term 30-year bond yields also plunged 1-1/2 basis points to 1.12 percent and the yield on short-term 1-year bond also traded 3-1/2 basis points lower at -0.80 percent by 09:00 GMT.

The consensus expects the ECB to allocate EUR110bn via its target LTRO after allocating EUR62.2bln at its last operation. Given that this is the last TLTRO allocation, demand could be heavy and should the allocation exceed the EUR110 expectation,excess EUR liquidity will be parked at the front end of the EUR curve pushing rates lower, which at the margin is a EUR negative. However, for developing a more pronounced bearish impact on the EUR the liquidity boostneeds to impact the 2-year EUR swap. A decline of the German Schatz yield is not sufficient for driving the EUR lower. ECB’s Nouy (8am) and Lautenschlaeger (3pm) will speak today.

EM and risk outlook stays relatively supported but we see risk aversion alert signs across the board. While investors focus on US politics and especially on today’s vote on the repeal act of Obamacare, other developments should, in our view, not remain unnoticed: a research paper published by two Fed economists and released by the Brookings Institute suggesting US interest rates staying low with the Fed tolerating inflation overshooting targets, the ECB’s targeted LTRO allocations, and the continued fall of iron ore futures. Despite equity markets retracing some of the post-election rally, US monetary conditions have become more accommodative with the falling USD contributing most to this easing. Foreign conditions have turned from providing hefty headwinds as experienced from 2012-16 into tailwinds, helping US reflation gain momentum over time. Accordingly, we prepare for putting on FX trades that benefit from a steeper US yield curve. Short EURSEK and long USDJPY fall into this category. While short EURSEK should work from now, USDJPY’s current downward momentum suggests waiting for 109.50 or for a stabilisation above 112.50 before establishing longs.

US vote: Today markets will wait for the outcome of the vote but FX investors should note that the vote is not scheduled for a specific time. At the moment the vote count may be low so the Republican leaders need the time to gather votes, indicating why no specific time is provided. There is even a risk the vote may be delayed if the leaders feel the vote may not pass.

Watching iron ore. The PBOC-run Financial News newspaper highlighted that the recent rise of RMB money market rates should be put into the context of recent money market operations. China seems to be tightening its monetary conditions to deal with excessive leverage. Importantly, tighter RMB lending conditions have sparked China’s USD denominated loan demand, pushing its USD denominated liabilities up again. Should this loan-related USD inflow into China end up into a higher FX reserves (see chart below) – thus providing an additional signal that offshore USD liquidity conditions are on the rise – EM markets should see further inflows. Meanwhile, China has seen the ratio of mortgage loans to total credit of commercial banks reaching uncomfortably high readings. It has been China’s property and infrastructure investment driving commodity – including iron ore – demand. Authorities are now directing growth away from the property market which suggests that commodity prices may ease. Falling iron ore prices will not bode well for the AUD. Within this context we recommend using the AUD as a funding tool for high yield EM longs and for a long GBP position. GBPAUD has moved away from levels suggested by relative forward curves.

The Australian bonds traded in a tight range Tuesday as investors refrained from any major activity amid a light trading session. Also, the Reserve Bank of Australia’s (RBA) March monetary policy meeting minutes, painted a mixed picture of the economy, adding sluggishness to market sentiments.

The yield on the benchmark 10-year Treasury note, hovered around 2.82 percent, the yield on 15-year note also traded flat at 3.21 percent and the yield on short-term 2-year remained steady at 1.81 percent by 04:20 GMT.

The minutes of the RBA March board meeting continued to paint the picture of an RBA unwilling to move official interest rates anytime soon. The Board highlighted a range of positives, but concerns were also raised. The central bank was notably more upbeat about the global outlook and the flow on effect to higher commodity prices.

Concerns surrounding the outlook for the labor market were apparent, with the RBA noting that “conditions had remained mixed” and that “momentum in the labor market remained difficult to assess”. A further mixed picture on the labor market leaves the RBA between a rock and a hard place.

Lastly, markets will now be focussing on the RBA Deputy Governor Guy Debelle’s speech, scheduled to be held on March 22 for further direction in the debt market.