Global Rates, 5-30 Spread Widening, Jackson Hole
BTP/Bund spreads experienced increased widening pressure yesterday, with investors appearing to unwind some of their summer carry trade positions. 5-30 spreads over Bunds widened by c.7bp, while the concession versus Bonos was c.3-4bp. The upcoming weeks and months hold quite some headwinds for BTPs: the resumption of supply pressure, with BTP auctions slated for Wednesday next week, an ECB QE taper decision pending this autumn and the general elections looming early next year. That this is not yet a classic flight to safety episode is underscored by the fact that 10yr Bund yields were unchanged at 0.40%. Moreover, semi-core spreads were little changed, even though 10s30s in OLOs and OATs steepened by more than 1bp. Meanwhile, equity markets (outside of the FTSE MIB) seemed more preoccupied with regaining some of the lost ground over the past weeks.

Ahead of the Jackson Hole symposium kicking off tomorrow, ECB Draghi’s opening speech at the Lindau Nobel laureates meeting on economic sciences today will be followed closely. But it would be an unusual choice of venue and timing to provide new policy guidance. Elsewhere, flash Eurozone PMI data should confirm the ongoing recovery across the currency bloc. EGB & SSA supply. Today Germany will tap the 10yr benchmark DBR 8/27 for €3bn. Absolute 10yr yields are relatively low given that levels around 0.60% were seen a little more than a month ago.

The recent richening of 10yr Bunds is also evident in the 5/10/30yr fly valuation, which is back near the levels prevailing before Draghi’s Sintra speech. The auction may nonetheless be supported by its timing, with the carry trade unwind seemingly having started. Moreover, repo specialness (c. 25bp in s/n yesterday) remains a strong selling point of the 10yr Bund. In SSA space UNEDIC has mandated banks for a tap of the 4/32, thus following in the footsteps of NWB bank and Rentenbank yesterday. The former priced a €600mn 30yr social bond NEDWBK 1/48 at MS+19 versus an initial guidance of MS +22. The latter launched the 8yr RENTEN 8/25 at MS -23 coming from an initial guidance of MS -21. We are also still waiting for an RfP from the EFSF ahead of next week’s auction slot.


New Zealand’s 10-year bond yields rose 2.3bp to 2.83% overnight as the RBNZ signalled it would allow the economy to run hot before starting to reduce monetary accommodation in earnest. Similar to previous Fed communication, it indicated the ‘need for stronger capacity pressure than might otherwise be necessary to generate a given level of inflation’, prompting a fall in real interest rates weakening NZD. The rate projection continued to show the OCR would remain unchanged until mid-2019, in contrast to market pricing for the first hike by around August next year. RBNZ’s Wheeler and Mc Dermott have tried to be as explicit as possible that they don’t like the NZD trading as strong as today. Firstly their NZD forecast is lower than today. Secondly, they referred to the traffic light system of deciding when to intervene in FX markets, as an indication they are thinking about it. Finally McDermott stated specifically that the NZ dollar needs to adjust down. Long positioning in the NZD is at risk. Anyhow, the uncertain outcome of the upcoming General Election, signs of its housing market slowing down from overvalued levels and the upcoming leadership transition within the RBNZ should keep the NZD on the back foot, which should be best expressed by long AUDNZD.

The RMB is trading at the strongest level since mid-March, based on the CFETS basket. High real yields, a stable currency and a resilient economy seem to be transforming China into a local safe haven destination with continued tensions in Korea working as an additional catalyst for RMB strength. RMB strength has FX implications going beyond directly impacted currency pairs. The 10-year US – China yield differential has reached 141bp,not far off the 149bp reached in June. This not only keeps domestic funds within China, thus reducing the capital outflow risk; it may also attract foreign capital too. China’s FX reserves have started to rise again. Rising FX reserves suggest that there is an excess of hard currency to be recycled back into DM bond markets, keeping bond yields lower than otherwise suggested. In addition, some of the reserves may be reallocated away from USD, keeping the USD internationally offered. The second Exhibit shows the relationship between the DXY and USDCNH, suggesting China’s RMB push higher should especially keep EURUSD supported as the EUR acts as the alternative reserve currency to the USD.

Yesterday, we warned about risk turning tactically offered as investors de-risk their portfolios in light of the increasing Korea-related tail risk. Price action confirms that this move is about position squaring and not about the reassessment of the global economic outlook. Corrective activity occurred in places where positioning is extreme, while other market segments with low positioning have not joined the risk downside correction. Concretely, industrial metal prices continued to rally which looks even more impressive in the context of China’s recent tightening of its monetary conditions. The industrial metals rally supports the view of a strongly expanding global economy subsequently leading to reflation. Consequently, we view the current risk setback as providing a buying opportunity.


Global FX, US Inflation Expectations, Real Yields and EMFX
US inflation indicators coming in on the soft side of market expectations suggest risk appetite should stay solid. This morning saw raw material prices breaking higher once again despite the release of slightly weaker Chinese PMIs (July non-manufacturing PMI declined to 54.5 from 54.9, manufacturing PMI fell to 51.4 from 51.7), continuing the bullish trend which started in June, with iron ore prices 38% higher. Asian materials producers have rallied overnight. Some indicators suggest that market participants are not relentlessly bullish: NASDAQ has weakened over the past several days; weekly Fed data suggest primary dealers increased their bill holdings to their highest level since 2014;and foreign investors reduced their holdings in the Korean stock market at the fastest pace since August 2015. It is this ‘wall of worries’ which should keep the bull trend intact. In order to reverse our bullish interpretation, we need to see higher US inflation rates, the Fed signaling a significant increase in its pace of withdrawing monetary accommodation, or US real rates rising with the help of stronger data releases, notably higher capital expenditures. These seem unlikely without a calmer US political environment.

Conditions for a risk reassessment are not yet in place. US real rates have declined over the course of the past week, eeping the USD on the back foot and allowing for a higher valuation of risky assets. It seems that overseas Treasury demand has contributed to keeping US nominal and real yields lower, supporting our thesis of viewing the current macro landscape through the lens of the 2004-2006 cycle. During this period it was US nominal funding costs staying below the anticipated nominal return of investment which led to a leverage boom. Consequently, foreign central bank holdings of US debt at the Fed have jumped to USD3.33tn, the most since 2015. The portion of the Treasury market held by foreign investors is climbing in 2017 after dropping last year.

Reserve managers increasing their foreign asset holdings suggests to us that there is too much hard currency in circulation, which we view as a late cycle effect of DM central banks increasing the size of their balance sheets via QE operations. Initially, QE increased onshore liquidity with DM central banks expanding their balance sheets, but funds remained largely onshore. This created an environment of USD shortage abroad, reflected in the widening of the cross currency basis. It is the new strength of the financial sector now driving offshore USD liquidity conditions. Banks and other investors are arbitraging onshore – offshore spreads, in turn reducing the offshore USD scarcity. The rise in offshore USDs increases reserves. Official institutions invest these reserves into US Treasuries, pushing US bond yields down, reducing the relative attractiveness of USD holdings for private funds, in turn boosting EM inflows and pushing EM FX reserves even higher.

However, the relative decline of US nominal and real yields can only partly explain USD weakness witnessed since the start of the year. Indeed, the USD trades at a politically derived discount as investors have priced out the probability of reforms increasing the growth potential of the US economy. Worse, reform uncertainty has held back investment, suggesting the return of a reliable policy approach could have a significant effect in pushing the US economy towards better growth.

The sell-off in 10yr Bunds took a pause yesterday, as some flight to safety on the back of the missile test conducted by North Korea and dovish comments by ECB Executive Board member Peter Praet underpinned demand. The volume of the Bund future, however, was almost 50% below its 10-day moving average thanks to the closure of US markets. Moreover, yields on 30yr German paper continued their ascend. Meanwhile, semi-core and peripheral bonds managed to squeeze out some further tightening verus Bunds, with OLOs and Bonos bucking the trend though – which makes sense given their tight levels relative to comparables. Interestingly, we find 8-10yr Spain currently trading at the tighest level versus OLOs of the past two years. With US markets open again, the main focus today is on the release of the FOMC minutes, which should offer clues as to whether the intended changes to the balance sheet reinvestment policy are indeed forthcoming “relatively soon”. Interestingly, we find the fed funds strip between the Nov-17 and Jan-19 contract having re-steepened more than 10bp over the past two weeks, suggesting more and more market players are embracing the view that the Fed delays their next rate hike until December and announces the start date of the reinvestment policy changes at the September meeting.

ECB QE data. Net asset purchases in June amounted to €62.4bn. PSPP purchases accounted for €51.6bn (82.7%). Interestingly, purchases remained skewed towards France and Italy, whereas German purchases were roughly in line with the Bundesbank’s capital key in the ECB for the third month running. Furthermore, the weighted average maturity of German purchases jumped from 3.99 years in May to 5.33, the highest reading since January (we doubt the monthly WAM estimate was meaningfully influenced by the reinvestment of maturing holdings). This sheds further light on the strong tightening seen in Schatz ASW spreads last month EGB supply. Germany will launch a new 5yr OBL today. With the markets recently reassesing the ECB policy outlook, the 5yr segment has cheapened more than 10bp on the fly versus the 2s and 10s since the end of May, and more than 12bp on ASW. This should ensure today’s auction won’t fail. Also note that the OBL 10/22 traded at an attractive roll of 9bp in the grey market yesterday – and that 4-5yr OBLs trade at a concession versus the interpolated DBR curve.

Some DM central banks potentially undergoing a regime shift – trying to avoid mistakes of the previous cycle when funding costs undershooting nominal return expectations for too long led to a leveraged-funded boom and capital misallocation, eventually unleashing a substantial deflationary shock – stand in contrast to falling energy prices in terms of market implications. Fed minutes confirmed anticipated hawkishness, leaving it only a question of time before the Fed starts its balance sheet reducing operations. The ECB will release its minutes today. More important will be ECB’s Weidmann’s speech on the future of the EUR.
Simultaneously, markets have to digest oversupply issues mainly affecting energy markets. Here, two big issues seem to stand out. First, OPEC’s inability to stay compliant with previously agreed production cuts and second, the US turning into an energy exporter following its shale energy revolution. Our US economist estimates business investment into US oil and gas drilling structures will increase by 80% in Q2and 25% in Q3,not only supporting US economic growth via its implementation, but also adding to the supply of energy into global markets. The FT is running an article today suggesting that LNG supply could increase by about 50% from 2015 to 2020. The US will turn into a leading LNG supplier. Australia has also now built up infrastructure to become a big LNG exporter. Our stance of selling currencies of traditional oil suppliers such as NOK and COP remains unchanged.
Declining energy costs have helped dampen inflation expectations and yesterday’s pause of US yields breaking higher despite increasing prospects of the Fed adding to future net bond supply should be attributed to oil prices showing their biggest decline since 25th May. The 5% oil price decline on 25th May set the starting point for a four-week decline, seeing Brent losing around 17%.
The exhibit illustrates the crucial position in which markets are currently progressing. We compare the 10-year US real yield with 10-year US breakeven. For risk markets to flourish, a combination of falling real rates and rising inflation expectations bodes well, explaining the strong equity performance witnessed in 2012/13. The reverse picture emerged in 2015, pushing share markets into two significant downward corrections in August 2015 and January 2016. The problem is that real rates have diverged from falling inflation expectations as they did in 2015. In this sense, falling energy prices are not risk supportive if not compensated by other reflationary forces. Yesterday, we mentioned rallying soft commodity prices. Today, we like to put our emphasis on growth data where we hope the upcoming June ISM non-manufacturing PMI and NFP report may allow the gap between US real rates and inflation expectations to narrow somewhat.

This analysis suggests that the risk outlook has turned more data sensitive. The Fed’s potential change of its reaction function – now increasingly emphasising buoyant financial conditions – and its readiness to look through current weak inflation data have created this new data sensitivity. The Q2 earnings reporting season starting tomorrow should help tip the balance in favour of risk appetite for now. We stay USDJPY bullish and use a near term setback to last Friday’s bullish 112.00 break point as a buying opportunity. The 10y JGB yield trading up to the unofficial 10bp upper ceiling due to a weak open market operation should not strengthen the JPY. There is no appetite within the BoJ for moving the signposts of its yield curve management policy yet. The MoF weekly security flow data showed foreign investors shying away from JPY money market investment, suggesting the USDJPY cross-currency basis should stop tightening, thus no longer reducing Japan-based investors’ hedging costs. Japanese investors reducing their FX hedge ratio should strengthen USDJPY.

GBP has corrected some of its recent gains in light of weak UK postelection PMI readings. Remember, post-Brexit UK soft indicators crashed for a couple of months before turning back up again. Anyhow, our GBP optimism finds its foundation in what we call ‘Brexit economics’ and the BoE reconsidering GBP weakness and its impact on the economy. So far, GBP weakness has been unable to lift net exports, but ithas undermined real disposable income via rising import prices. In short, GBP weakness has undermined living standards and with inflation above the BoE’s 2% target and its own staff projections, GBP stabilisation should now be on the BoE’s agenda. Talking up rate expectations is a sufficient tool to reach this target. With regard to the GBP outlook, we should not underestimate the growing influence of Chancellor Hammond within the Cabinet. There is a new openness to listen to businesses to reduce Brexit-related supply and market access restrictions, which should work in favour of the market which is still GBP short positioned. We hold our GBPUSD 1.32target.

We expect the CBT to end the tightening cycle and remain on hold this month with inflation peaking, relief in domestic political concerns and the conducive external backdrop. Equally, the bank is likely to refrain from early easing. This should be TRY supportive as the lira retains its very high risk adjusted carry. TURKGBs look attractive from a carry perspective, but one should not expect a YTD-like strong performance as the CBT is at no hurry to cut rates.

• The CBT is to keep the current tight liquidity stance for a while, until the recovery in the inflation outlook becomes apparent.
• Ongoing geopolitical issues (which could create pressure in market prices) as well as still elevated inflation levels will likely force the CBT to be cautious and refrain from early easing.
• We think any easing would be via gradual increase in TRY liquidity, while the policy rate, the upper/lower bounds of the interest corridor and late liquidity window rate will likely remain unchanged until the year end.

FX: In the current carry-friendly environment, TRY continues to stand out for numerous reasons: (a) the CBT regaining inflation-targeting credibility by keeping interest rates high despite CPI likely reaching its peak and the appreciating TRY; (b) TRY offers extremely attractive risk adjusted carry compared to its high yielding EM peers (Fig 5) due to the CBT’s tight liquidity stance and high average funding costs; (c) the still very attractive medium-term valuation, with USD/TRY currently being overvalued by c.24%. The expected CBT decision on Thursday to keep interest rates unchanged and leave the current liquidity stance tight (now and for a foreseeable future) should underpin the lira’s attractiveness. In the relative value space, TRY seems to be the most attractive among the CEEMEA higher yields as RUB decoupled from the oil price and seems too rich while ZAR’s highly unpredictable domestic politics warrants a larger risk premium and caution vs TRY. We expect USD/TRY to break through the 3.5000 level, though the bulk of future returns from long lira positions should come from the carry factor, rather than spot appreciation.

Domestic Debt and Rates: Following a c.150bp rally in long-end bond yields from the peak observed at the beginning of this year, we do not expect further strong performance. The 10-year TURKGB yield should not meaningfully break below the 10% level given the tight CBT policy stance and what we see as a low probability of rate cuts in coming months. Yet, given its high nominal yield and the likely increase in real yields once Turkish CPI starts moving lower more meaningfully (by the end of this year or the beginning of the next – Fig 6), TURKGBs look attractive from a carry perspective. Long dated bond yields should hover around current levels in coming weeks. For USD-TRY cross currency swap rates, we also expect limited room for a decline from here, given the tight CBT liquidity stance and expected only modest TRY spot appreciation.

In the June MPC meeting on 15 June, we expect the Central Bank of Turkey (CBT) to remain mute and keep all relevant rates unchanged. Since the beginning of this year, the CBT has increasingly used unorthodox policy tools and in the last two meetings, the bank was more hawkish than expected with more-than-expected hikes on the late liquidity window rate. The bank has pulled the effective cost of funding significantly up, by c.370bp since end-2016, to close to 12.0%. During the tightening process, the late liquidity window (LLW) rate, a facility to cover emergency needs of the banks, has been aggressively utilized, while the bank has also introduced a new tool by opening an FX-deposits-against-TRY-deposits market, a swap facility with 1-week maturity. Utilisation of the tool has reduced volatility in excess TRY liquidity in offshore markets and helped achieve stabilisation in the TRY. This month, we do not expect a further tightening move, given that inflation has already peaked in April.
Following significant deterioration in recent months with the lagged spillovers of TRY depreciation and volatility in food prices, inflation showed modest improvement in May from its high levels in April (the highest since the GFC). Core inflation (excluding all food & beverages, energy, alcoholic drinks & tobacco, gold) recorded a 1.33% change, below the average of May changes. This is another sign of weakening following a moderation in the strong upward pressure last month. As a result, annual inflation in this indicator inched down to 9.38% from 9.42% a month ago. However, core figures stay elevated, despite the fading FX pass-through. We thus think the bank has likely reached the end of the tightening cycle and won’t embark on further tightening unless the currently supportive global backdrop changes significantly. Recent TRY strength (due in part to the supportive global backdrop and improving political climate after the referendum) works to the CBT’s advantage, with increasing downside risks to the inflation outlook.
On the flipside, the bank should refrain from early easing and keep its current tight liquidity stance in place for a while, until the recovery in the inflation outlook becomes apparent. Economic activity continues to strengthen, thanks to fiscal easing, given stimulus measures such as VAT cuts in some consumer durables and social security premium cuts and significant lending acceleration. Credit growth (13-week MA, FXadjusted and annualised) has converged to 25% on the back of contributions from the Guarantee Fund. Recently released indicators hint at some further acceleration in 2Q17 economic activity, with higher PMI in tandem with rising CUR.

Treasury Secretary Mnuchin said that the US government has “backup plans” for funding itself if Congress doesn’t raise the debt limit before lawmakers leave for their August recess as hoped. When the US Treasury used accounting methods to bridge shortfalls ahead of the increase of the 2015 debt ceiling, US front-end rates fell to zero, but this happened within an environment of increasing global deflation concerns and China facing risks of substantial outflows threatening financial stability. Nowadays, global growth conditions are supportive as 2015 global economic headwinds have turned into powerful tailwinds for the US. The Treasury using accounting flexibility suggests it will issue less, which may ease US financial conditions further. There is no need for the Fed to reconsider the pace of its anticipated tightening path, it seems.

Ahead of Wednesday’s FOMC meeting, US financial conditions continue to improve, supported by the US House Republicans passing the vote to revamp the Dodd-Frank Act and repeal the Volcker Rule which restricted banks from making speculative investments with their own capital. This suggests freer investment in riskier assets as well as lower US funding costs. Hence, we pay little attention to the 1.8% decline of the NASDAQ on Friday, considering the resilience of the broader S&P 500 and limited spillover into Asian equity markets. A 25bp Fed Funds rate hike is 95% priced in, suggesting that all eyes will be on the statement in respect of the Fed’s judgement of the future economic outlook, and on the FOMC providing updates on their Policy Normalization Principles and Plans, including a set of gradually increasing caps, or limits, on the dollar amounts of Treasury and agency securities that would be allowed to run off each month, and only the amounts of securities repayments that exceeded the caps would be reinvested each month.


US Interest Rates and the Fed
The Federal Reserve left monetary policy unchanged yesterday in what was a unanimous decision. The accompanying statement saw few meaningful changes to the one issued following the March announcement. The Fed still expects inflation to “stabilise around 2% over the medium term” while growth risks “appear roughly balanced”. There were slight nuances given that 1Q GDP was disappointing and the PCE deflator has softened recently, but the Fed suspect’s these developments will be “transitory”. In terms of the direction of policy the Fed reiterated that they believe economic conditions will “evolve in a manner that will warrant gradual increases in the federal funds rate”. Their last forecast update, published in March, showed that at that point in time the median Fed member’s expectation for the Fed funds rate was 1.4% for end-2017, 2.1% for 2018 before rising to 3% by end-2019. In terms of the outlook for policy we continue to favour just one 25bp hike this year rather than the two to three currently pencilled into the Fed’s FOMC member forecasts and the 40bp of tightening priced in by the OIS curve. The recent data flow has been somewhat softer than hoped, be it business surveys, GDP, employment growth or inflation. There is also a lack of clarity on the scale and timing of any fiscal stimulus brought about through President Donald Trump’s tax and spending plans. Consequently, there is scope for market disappointment that could lead the Fed to reappraise the situation. The statement also repeated that the Fed will maintain its “existing policy of reinvesting principal payments from its holdings” of debt securities and of “rolling over maturing Treasury securities at auction”. We will have to wait for the minutes to this meeting to see the actual discussion around this. Last time officials suggested that we could hear something about lowering the reinvestment rate this year. Such action would reduce demand from the biggest buyer and likely lead to higher longer dated bond yields and a steeper yield curve. However, given our more cautious prediction for Federal Reserve rate hikes we see scope for this policy change to slip into early 2018 – note the line that the wind down in the balance sheet won’t start “until normalization of the level of the federal funds rate is well under way”.


European Interest Rates
The outcome of the first round the French presidential election will likely dominate global yield behavior over the coming two weeks. Whether the impact will be limited to that period or last longer will depend on the outcome. In our view, the risk of surprise is higher in the first round, given how closely bunched together candidates’ poll numbers are (Macron 23%, Le Pen 22%, Fillon 20%, Melenchon 19%). It appears likely that the candidates’ final poll readings could end up within the margin of error ahead of the election, making it hard for markets to price out this risk ahead of actual results. The main reason, of course, is that both Le Pen and far-left candidate Melenchon are staunchly anti-EU, and a victory by either would be highly disruptive for both France and Europe more broadly. Alleviating some of the tight polling in the first round is the fact that the second round polls show a comfortable margin for either mainstream candidate (Macron or Fillon) in a head-to-head matchup with Le Pen. Even here, however, there are some risks, as there’s more of a mixed result versus Melenchon. The real risk to markets then, appears to be Melenchon making it to the second round. We discuss how interest rates markets may react to the various outcomes in the first round below. The first, and more likely scenario in our European economists view, is that Le Pen and Macron will be the top two finishers in the first round. In this case, polls indicate that Macron is expected to win fairly easily in the second round, having consistently led by about a 20 point margin—markets would view this outcome as fairly benign. We had estimated previously that there was about 25bp of “redenomination risk” premium in Bunds.

Since then, more of this negative premium has been priced into German sovereign debt, and we now estimate there’s about 35bp. Some of this is likely to be unwound immediately following this outcome in the first round, though not the entire 35bp as the second round polls are still over two weeks away. In terms of peripheral spreads, this would mean compression, given that they are currently close to their widest levels seen in the past few years. Some caveats are in order; in the event that Le Pen wins with a much larger margin than current polls show, the selloff in bunds may be rather muted, given that a surprisingly large margin could reveal some polling issues.


The first trading day after the long Easter weekend saw a lot of volatility in EGB markets, helped by the call for snap elections in the UK. Interestingly, despite the risk-off mood in equities and widening in iTraxx credit indices, peripheral EGB spreads managed to tighten. What is more, the 10yr OAT/Bund spread eventually closed little changed at 73p, although 5yr spread widened by 2bp. Thanks to the afternoon rally in US Treasuries, the 10yr Bund yield closed 3bp lower at 0.15%, hitting the low end of the year-to-date range. With four French presidential candidates clustered around 20% in the polls for the first round on Sunday and the backdrop of heightened geopolitical uncertainty, we expect core bond yields to hold at current depressed levels in coming days.

ECB QE data. In the first full week of buying subject to the new monthly target of €60bn total APP purchases amounted to €15bn, which suggests a moderate frontloading ahead of the Easter weekend. The PSSP accounted for €12.5bn, or 83% of the total. This share is within previous ranges, if not slightly lower, with the average since July 2016 at 85%.

EGB supply. Today Germany will re-open the off-the-run DBR 2.5 7/44 line for €1bn. The bond is trading exceptionally rich on ASW by historical standards (i.e. -38bp). However, it is also trading rich in repo (i.e. -0.85% s/n yesterday), suggesting a short base among dealers, and looks cheap on the curve, with the DBR 42/44/46 micro-fly at its highest level on record. This should ensure that the auction won’t fail. For comparison: the previous tap in February saw a real bid/cover of just 0.7 and a retention rate of 41.7% Elsewhere, KfW is expected to launch a new 5yr EUR benchmark today. Interpolating between the KFW 0 6/21 and 7/22 lines would pitch fair value on the secondary curve in the MS -39/-38bp area. Belgium yesterday announced that the bonds that will be tapped on April 24 are going to be the OLO 10/23 and 6/27 lines.

The German 10-year bund yields hit its lowest since December 30 last year on Tuesday as investors poured into safe-haven assets ahead of the Eurozone’s final reading of the consumer price inflation (CPI) for the month of March, scheduled to be released on April 19.

The yield on the benchmark 10-year bond, which moves inversely to its price, slumped nearly 2 basis points to 0.17 percent, the long-term 30-year bond yields plunged 1-1/2 basis points to 0.91 percent and the yield on short-term 2-year bond also traded nearly 1-1/2 basis points lower at -0.86 percent by 08:30 GMT.

The Eurozone flash CPI inflation reading declined to 1.5 percent for March, from 2.0 percent in February. This was significantly below market expectations of a 1.8 percent increase and the lowest reading for three months.

The core inflation reading also declined to 0.7 percent from 0.9 percent previously and was below expectations of a smaller decline to 0.8 percent. The core rate was 1.0 percent for March 2016, illustrating that overall inflationary pressure has been subdued.

Defying demand for a general election for months, the UK Prime Minister has finally decided to hold a snap general election on June 8th in order to receive a mandate from the people of the United Kingdom to take the country through the two-year Brexit process. She surprised many politicians as well as the market with her announcement from the Downing Street. The decision reportedly came after consultations with senior figures and advisors within the party. The recent state of the opposition Labor Party which is fighting internal battles and revolts against the leadership of Jeremy Corbyn might have also influenced the decision. The recent opinion polls show that Theresa May’s conservative party is as much as 21 percent ahead of the main opposition, so holding an election now would likely provide Ms. May with a stronger majority in the parliament.

In addition to that, a win by Ms. May would also end the criticism that she has not contested her post; instead, it was given to her as the former Prime Minister David Cameron resigned after the referendum. This surely adds to the political uncertainties in Europe.

The pound initially suffered a shock selloff on the news but recovered and now trading stronger for the day at 1.264 against the dollar.

The opposition Labour party leader Jeremy Corbyn has welcomed the decision.

The following are some of the highlights from last week’s release of the central bank’s monetary policy minutes from the 30 March meeting. The majority of the board members noted that the “preventive” monetary policy adjustments since late 2015 have generated an “appropriate stance” to face the shocks that the central bank has been facing. One board member said that possible interest rate increases abroad would not necessarily have to be matched with a greater monetary restriction in Mexico, in the absence of additional adverse shocks that could affect inflation in Mexico. Two board members, however, countered this. One of them said that “it is probable that new increases in Mexico’s overnight rate may be needed in coming months” to ensure the convergence of inflation to the target. Another board member said that there cannot be much flexibility for the central bank of Mexico to deviate from monetary policy decisions taken by the US Federal Reserve and, therefore, the central bank of Mexico should at least keep the current short-term interest rate differential with the US. The majority of the board members agreed that the balance of risks to inflation did not worsen further, but noted that risks to inflation are still to the upside (higher inflation), mainly due to the number of inflation shocks in recent months. The majority of the board members also noted that conditions in the labor market have been tightening “in an important way.” Some of them think that the output gap is at zero and one of them said that there are indicators that reflect risks of possible generalized pressures on prices. Another board member noted that he is not too concerned about wage-related pressures on prices given that the economy is slowing down and that recent pressures on wages have not been excessive. The majority of the board members acknowledged the risk of an abrupt reversal in investor sentiment, due to economic policies in the US, geopolitical problems and/or the strengthening of nationalist policies particularly in Europe.

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.

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.

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.

UK’s manufacturing output rose by 1.2 percent in the last quarter of 2016. Boost to competitiveness from sterling’s depreciation last year was probably a key driver of this upturn. The underlying trend is clearly upward, as is indicated by the 1.9 percent rise in Q4 production when compared to the same quarter a year ago, says Lloyds Bank.

Official data for the month of January showed a small fall in output in January and the February purchasing managers’ survey showed a modest decline in the level of the headline index from the previous month. Analysts at Lloyds Bank opine that the declines are probably just temporary retreats after outsized gains in previous months.

“With orders as measured by both the PMI and CBI surveys strong enough to point to further output gains over the next few months, the sector still seems on course for further expansion,” said Lloyds Bank in a report.

Fall in manufacturing investment, however, raises concerns about the sustenance of upside in the longer term. UK manufacturing investment probably fell by more than 4 percent last year, its weakest performance since 2009. The start of the Brexit negotiations will likely create more uncertainty which could hamper investments going forward. Continued sluggish investment growth may add to concerns about the UK’s modest productivity performance, adds Lloyds Bank.

The Westpac-McDermott Miller New Zealand consumer confidence index edged slightly lower in the March quarter. Survey showed that people grew wary about the short-term economic outlook, but extended the nation’s run of optimism to six years.

The Westpac McDermott Miller consumer confidence index fell 1.2 points to 111.9 in the March quarter, but remained above the long-run average of 111.4. The present conditions index decreased 0.2 points to 111.2 and the expected conditions index fell 1.9 points to 112.4.

“March’s slight fall in confidence mainly reflected some anxiety about the upcoming election. It might also reflect concerns around housing affordability or political developments offshore, both of which continued to hit the headlines in recent weeks,” said Westpac Banking Corp senior economist Satish Ranchhod.

The latest economic data showed GDP figures showed that on a per-capita basis, household spending rose by around 2 percent last year which reflected a healthy level of spending confidence. With a growing confidence of consumers in their own household financial security, and a positive outlook for the New Zealand economy we could expect continuing positive consumer sentiment to translate into sustained growth.

Growth in Japan is holding up nicely and economic activity has gained momentum since 4Q16 with the pickup in the global capex and manufacturing cycle. Inflation has started to push back above the waterline. But as Governor Kuroda emphasized at a press conference last week, inflation expectations remain stuck, something highlighted by this year’s spring wage negotiation projected to produce only modest wage increases. With price pressures nailed to the floor, the Bank of Japan (BoJ) doesn’t seem to be in a hurry to raise rates.

“With our USD rates forecasts pushed upward, we now expect that the BoJ will taper its asset purchases at a somewhat slower pace than previously and that QE will end in H2 2019, instead of mid-2019. JGB rates unchanged,” said DNB markets in a research note to clients.

There is an ongoing debate whether the BoJ will have to raise its 10-year bond yield cap because of the lack of JGB liquidity. There seems to be still a split of views inside the BoJ on whether the Bank should or should not raise the 10-year yield target when the real interest rates decline further. The longer the BoJ keeps the 10-year yield target unchanged, the more rapidly it will have to adjust the target later.

Analysts expect the BoJ to maintain the current 10-year yield target through year-end, but if it sees greater yen weakness, it would adjust the target in 2H17. BoJ will have to strengthen communication strategy with forward guidance on its yield curve control (YCC) policy to manage market expectations. It would probably provide the conditions under which the BoJ would raise the 10-year yield target.

“While we expect the BoJ to introduce forward guidance on its yield curve control (YCC) policy relatively soon, we think it would do so in July at the earliest, when the BoJ reviews its economic outlook and discusses its monetary policy stance in the Outlook Report. If it may take time to build a consensus among the board members on this issue, delaying its introduction until October,” said J.P. Morgan in a report.

USD/JPY trades below 100-day moving average. The pair is tracking DXY lower, amid holiday-thinned markets (Japan closed for Vernal Equinox Day) and lack of fresh fundamental drivers. Technical studies are bearish, RSI and stochs are biased lower and MACD has shown a bearish crossover on signal line. 112 levels in sight, violation there could see test of 111.60 and then 111 levels.

The New Zealand bonds remained weak at the time of closing Friday, tracking softness in the U.S. counterparts amid a quiet trading session that witnessed data of little economic significance. Also, investors will remain focused on the GlobalDairyTrade (GDT) price auction, scheduled to be held on March 21.

The yield on the benchmark 10-year bond, which moves inversely to its price rose 1 basis point to 3.29 percent at the time of closing, the yield on 7-year note jumped nearly 1-1/2 basis points to 2.86 percent while the yield on short-term 2-year note also dived 1 basis point higher at 2.13 percent.

New Zealand’s economy expanded 0.4 percent q/q over the final three months of 2016. That was below consensus expectations and the softest quarterly growth experienced since Q2 2015. Q3 growth was also revised lower to 0.8 percent q/q (from 1.1 percent previously reported). As such, annual growth eased to 2.7 percent y/y.

New Zealand’s Dairy prices fell 6.3 percent in the latest GDT price auction, following a 3.2 percent decline a fortnight ago. Within this, powder prices performed poorly, with whole milk powder prices falling 12.4 percent to USD2,794/MT, and skim milk powder prices falling 15.5 percent. Meanwhile, AMF continues to be well-supported at high levels, edging down only 0.8 percent.

The Political establishment in Washington went into a frenzy last year after then-candidate Donald Trump said that he wants to restore relations with the Russians. Every time, Mr. Trump refused to criticize either Russia or Russian President Vladimir Putin, the established anti-Russia establishment in Capitol Hill went after him and that includes several media outlets like CNN, which colluded with the Clinton campaign during the election and more. The skepticism with Russia runs so deep in Capitol Hill and within the establishment that President Trump is considered by many as a Russian spy and they are still looking to prove connections between Trump and Putin.

A recent incident in Capitol Hill proves how deep the hatred runs. Senator John McCain of the Republican Party presented a proposal that envisions bringing Montenegro, a small Balkan country within the umbrella of North Atlantic Treaty Organization and that proposal was rejected by another Republican senator Rand Paul, who did not want to make additional military commitments when the US debt is already at $20 trillion. Russia allegedly took part in a failed coup during last year’s Montenegro election. Mr. Rand Paul’s refusal triggered a furor in Senator McCain, a well-known Russia hawk, who accused Mr. Paul of working with or for the Russian President Vladimir Putin.

Russia-US-Montenegro are part of global geopolitics and there is also nothing wrong being a Russia-hawk but when one accuses a colleague of working for Russia, then probably it’s not just hawkish; it’s a phobia, Russia-phobia.

The real question is, can President Trump overcome these phobics and reconcile with Russia?

New Zealand’s current account deficit narrowed as expected in Q4, leading to the smallest annual deficit (2.7 percent of the gross domestic product) since September 2014. Looking forward, there seem to be risks skewed towards modestly larger deficits on the back of higher global interest rates and a slow closure of the domestic credit-deposit growth gap, but this is not a cause for alarm.

The unadjusted current account deficit narrowed to USD2.3 billion in Q4 (from USD5.0 billion), broadly in line with consensus expectations. In annual terms, the deficit narrowed to 2.7 percent of GDP, which is the smallest deficit since September 2014 and well below its historical average of 3.7 percent.

In seasonally adjusted terms, the current account deficit also narrowed (by slightly more than we expected), printing at USD1.6 billion, down USD0.4 billion from Q3, driven by a further increase in the services surplus to an all-time high of USD1.2bn on increased international tourist spending, offset by a mildly larger goods deficit. The income deficit also narrowed by around USD0.4 billion to USD2.0 billion as income from New Zealand’s offshore investments increased in the quarter.

Further, net external debt of deposit-taking institutions rose a touch in the quarter to just over USD105 billion. However, that was offset by reduced external borrowing from the central government and ‘other’ sectors, meaning that the county’s total net external debt position actually fell to USD143.5 billion or 55.0 percent of GDP, the lowest since 2003.

The Japanese government bonds remained flat Wednesday as investors await to watch the Bank of Japan’s (BoJ) 2-day monetary policy meeting, scheduled to be held on March 15-16, announcing its decision on Thursday.

The benchmark 10-year bond yield, which moves inversely to its price, hovered around 0.09 percent, the long-term 30-year bond yields also traded flat at 0.87 percent and the yield on the short-term 2-year note remained rose by 1/2 basis points to -0.25 percent by 05:10 GMT.

The BoJ is expected to keep monetary policy steady on Thursday and stress that inflation is nowhere near levels that justify talk of withdrawing massive stimulus, as weak consumer spending casts a cloud over an otherwise healthy pick-up in the economy.

Further, at the two-day rate review that ends on Thursday, the central bank is expected to maintain its short-term interest rate target at minus 0.1 percent and a pledge to guide the 10-year government bond yield around zero percent via aggressive asset purchases. Analysts also expect the BoJ to keep intact a loose pledge to maintain the pace of its annual increase in Japanese government bond (JGBs), which is JPY80 trillion (USD696.62 billion).

The Australian bonds jumped Thursday as investors poured into safe-haven assets after reading the higher-than-expected unemployment rate for the month of February. Further, the change in employment dropped steeper than what markets had initially anticipated.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, slumped 11-1/2 basis points to 2.82 percent, the yield on 15-year note also plunged nearly 11-1/2 basis points to 3.21 percent and the yield on short-term 2-year traded 7-1/2 basis points lower at 1.81 percent by 03:20 GMT.

The February labour market report disappointed, with a fall of 6.4k jobs and a rise in the unemployment rate to 5.9 percent. The detail was slightly more positive than the headline with full-time jobs rebounding after the previous month’s sharp fall.

The soft tone to the February report provides further confirmation that the RBA is likely to be on hold for an extended period. Spare capacity in the labour market is taking longer than expected to be worked off, and is weighing on wages growth and pushing out the return of inflation into the target band.

Australia’s February business conditions retraced some of the previous month’s gains, but remain at levels consistent with solid growth. Confidence also eased back slightly. Business confidence also edged down in February, alongside a further deterioration in the Federal Government’s standing in public opinion polling.

The New Zealand bonds nose-dived Thursday, tracking weakness in the U.S. counterpart, with the 10-year yields sinking to over 2-week low after investors crowded demand in safe-haven assets, following lower-than-expected fourth-quarter gross domestic product (GDP).

The yield on the benchmark 10-year bond, which moves inversely to its price plunged 10 basis points to 3.28 percent, while the yield on 7-year note also slumped 10 basis points to 2.85 percent while the yield on short-term 2-year note dived 6-1/2 basis points to 2.12 percent by 05:50GMT.

New Zealand’s economy expanded 0.4 percent q/q over the final three months of 2016. That was below consensus expectations and the softest quarterly growth experienced since Q2 2015. Q3 growth was also revised lower to 0.8 percent q/q (from 1.1 percent previously reported). As such, annual growth eased to 2.7 percent y/y.

On the back of stronger terms of trade, nominal GDP rose 2.1 percent q/q (7.5 percent y/y), while real gross national disposable income (RGNDI) surged 2.8 percent q/q, the strongest quarterly lift since Q1 2010. In per capita terms, RGNDI rose 2.3 percent q/q. The benefits of this real income boost should not be discounted.

WTI dropped more than 9 percent last week as investors fear increased production in the United States and non-compliance within OPEC with the agreed production deal. WTI is currently trading at $48.7 per barrel and Brent at $51.9 per barrel.

Key factors at play in crude oil market –

February report shows that OPEC still remains in full compliance with the deal as a group but many members are yet to adhere to the agreed levels. Iran’s production crossed the agreed level in February but the country is still in compliance based on average monthly production.
Saudi Arabia could be bypassing the OPEC deal by increasing exports of refined products.
US production rose from 8.428 million barrels in last July to 9.09 million barrels per day last week. This is the highest level of production since last year. Payrolls are once again rising in the oil and gas sector according to ADP job numbers.
Some OPEC members are calling for no continuation of the deal when it expires in June.
Backwardation in the oil market extends further, currently at $1.05 per barrel.
API reported a draw 0.531 million barrels of crude oil.
Today’s inventory report from US Energy Information Administration (EIA) will be released at 14:30 GMT. Trade idea –

We expect the WTI to extend gains towards $59 per barrel, and then towards $67 per barrel. However, a decline towards $46 per barrel in the short term can’t be ruled out. We don’t suspect the oil price to break below $42 stop loss area for the long call.

A rate hike from the US Federal Reserve’s Federal Open Market Committee (FOMC) today is almost a certainty. The policymakers would conclude their two days of meeting today and announce the decision at 18:00 GMT, followed by a press conference by the Fed Chair Janet Yellen. As of data available for March 14th, the participants in the financial markets are pricing with 91 percent probability that there will be a 25 basis points rate hike. The market is pricing the next hike to be in June and the third hike to be in December.

We have prepared an FOMC dashboard that segregates members in three distinct groups, Hawks, Doves, and unknowns based on their remarks and commentaries made in public forums, focusing on the March interest rate decision. That dashboard is also suggesting that there will be a hike today. We have found that except for Minneapolis Fed President Neel Kashkari, all the other members are hawkish heading to the rate decision. We also couldn’t confirm the views of Daniel Tarullo, who has recently resigned and this is his last rate decision meeting.

The US dollar index is currently trading at 101.38, down 0.25 percent for the day. The dollar has been struggling to head to higher highs despite a full market pricing (almost) of a hike in March and three this year. So, the dollar index might see selloffs after the interest rate decision if the inflation and interest rate outlooks are not substantially upgraded beyond what was shared in the December projections. In addition to that, the major focus is on the Dutch election this week, for which the results would start appearing after the FOMC meeting.

The Australian bonds traded modestly higher Wednesday as investors poured into safe-haven assets ahead of the February employment report, scheduled to be released on March 16. Also, the Federal Open Market Committee’s (FOMC) monetary policy meeting, scheduled for later in the day will provide further guidance to financial markets.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, fell 1/2 basis point to 2.93 percent, the yield on 15-year note dived nearly 1 basis point to 3.32 percent and the yield on short-term 2-year also traded 1 basis point lower at 1.89 percent by 03:20 GMT.

Australia’s February business conditions retraced some of the previous month’s gains, but remain at levels consistent with solid growth. Confidence also eased back slightly. Business confidence also edged down in February, alongside a further deterioration in the Federal Government’s standing in public opinion polling.

“We expect the February jobs report, out later this week, to show a solid rise in employment, but over the longer term a sharper downtrend in the unemployment rate is likely necessary for a sustained boost to households’ perceptions of their finances,” ANZ Research commented in its latest research report.

Eurozone industrial production growth increased less than expected in January, data from the European Union statistics office Eurostat showed on Tuesday. Industrial production in the 19-member single currency bloc rose by 0.9 percent month-over-month in January and by 0.6 percent year-on-year.

Industrial production data missed expectations in a Reuters poll for an average monthly rise of 1.3 percent and a 0.9 percent increase year-on-year. Higher investment in machinery was partially offset by a drop in the production of consumer goods.

Data for December which initially showed industrial production fell by 1.6 percent on the month, were revised higher to now show a 1.2 percent drop. On a yearly basis, output went up by 2.5 percent in December, more than the 2.0 rise previously estimated.

Non-durable goods output slipped 2.6 percent in January after 1.4 percent gain in December, marking the first decline in three months. Growth in durable consumer goods production also eased to 1.5 percent from 4.3 percent in the previous month.

Capital goods production dropped 0.8 percent following 0.5 percent growth in December. The intermediate goods output slowed to 0.8 percent from 3.6 percent in the previous month. Energy production growth slowed only slightly to 6.9 percent from 7 percent.

The UK gilts slumped Tuesday ahead of the country’s labor market report, due on March 15 and as investors remain cautious ahead of the Bank of England’s (BoE) monetary policy decision, scheduled to be held on March 16.

The yield on the benchmark 10-year gilts, which moves inversely to its price, rose 1 basis points to 1.25 percent, the super-long 25-year bond yields also rose 1/2 basis point to 1.88 percent and the yield on the short-term 3-year traded flat at 0.24 percent by 09:50 GMT.

The BoE is expected to maintain its neutral policy stance at the monetary policy meeting, scheduled to be held on March 16. Further, the central bank is also expected to hold its Bank Rate at 0.25 percent while leaving the targets for the stock of government bond purchases (APF) and the stock of corporate bond purchases (CBPS) unchanged at GBP435bn and GBP10bn, respectively.

“In our view, the BoE seems to be more worried about slower growth than too-high inflation if this is only temporary. EUR/GBP has reached our 1-3M target of 0.87 and we are currently reviewing our forecast. We still see risks skewed to the upside for EUR/GBP in the coming months ahead of and after the triggering of Article 50,” Danske Bank commented in its recent research report.

The Japanese government bonds traded narrowly mixed Tuesday as investors await to watch the Bank of Japan’s (BoJ) 2-day monetary policy meeting, scheduled to be held on March 15-16, announcing its decision on Thursday.

The benchmark 10-year bond yield, which moves inversely to its price, hovered around 0.09 percent, the long-term 30-year bond yields also traded flat at 0.87 percent and the yield on the short-term 2-year note remained steady at -0.25 percent by 06:00 GMT.

The BoJ is expected to keep monetary policy steady on Thursday and stress that inflation is nowhere near levels that justify talk of withdrawing massive stimulus, as weak consumer spending casts a cloud over an otherwise healthy pick-up in the economy.

Further, at the two-day rate review that ends on Thursday, the central bank is expected to maintain its short-term interest rate target at minus 0.1 percent and a pledge to guide the 10-year government bond yield around zero percent via aggressive asset purchases. Analysts also expect the BoJ to keep intact a loose pledge to maintain the pace of its annual increase in Japanese government bond (JGBs), which is JPY80 trillion (USD696.62 billion).

Latest data released yesterday show that the upward march of inflation that continued early last year is still gathering pace in Europe. Spain released its consumer price inflation report yesterday and it showed that consumer prices in February rose at the fastest pace since 2012. In February, Prices were up by 3 percent from a year ago and on a monthly basis it is up by 0.3 percent from January. Two major contributors were transport prices that rose by 8.2 percent and housing prices which rose by 5.9 percent. Furniture and household good is the only sector that took a dip of 0.4 percent compared to the year-ago level. Spanish inflation came in line with that of the entire Eurozone, where the price rose by 2 percent, highest level in four years and above the target of the European Central Bank (ECB).

Data from Poland points that the return of inflation is not just a Eurozone development it’s pan-European and global as well. Inflation in Poland rose by 2.2 percent in February, which is again the fastest pace in four years.

However, one should pay an ear to the European Central Bank (ECB) President Draghi’s comments that the central bank is not worried about inflation as it is being largely driven by an increase in the prices of commodities. Lately, the prices of commodities, especially energy and industrials have taken a hit and it is likely to get reflected in the numbers going ahead. We at FxWirePro expect the European Central Bank (ECB) to continue its easing as declared and throughout the year.

The euro is currently trading at 1.063 against the dollar.

With January meeting gone, there are eight more Fed meetings scheduled ahead for this year and according to the December projection, the Fed is expected to hike rates by 25 basis points in three of them. The financial market has recently started pricing three rate hikes for the year. Let’s look at the market pricing of the hikes, (note, all calculations are based on data as of 10th March)

March 15th meeting: Market is attaching 11 percent probability that rates will remain at 0.5-0.75 percent, and 89 percent probability that rates will be at 0.75-1.00 percent
May 3rd meeting: Market is attaching 10.5 percent probability that rates will remain at 0.5-0.75 percent, 82 percent probability that rates will be at 0.75-1.00 percent, and 7.5 percent probability that rates will be at 1.00-1.25 percent.
June 14th Meeting: Market is attaching 5 percent probability that rates will remain at 0.50-0.75 percent, 42 percent probability that rates will be at 0.75-1.00 percent, 49 percent probability that rates will be at 1.00-1.25 percent, and 4 percent probability that rates will be at 1.25-1.50 percent.
July 26th meeting: Market is attaching 4 percent probability that rates will remain at 0.50-0.75 percent, 35 percent probability that rates will be at 0.75-1.00 percent, 47 percent probability that rates will be at 1.00-1.25 percent, 13 percent probability that rates will be at 1.25-1.50 percent, and 1 percent probability that rates will be at 1.50-1.75 percent.
September 20th meeting: Market is attaching 2 percent probability that rates will remain at 0.50-0.75 percent, 23 percent probability that rates will be at 0.75-1.00 percent, 43 percent probability that rates will be at 1.00-1.25 percent, 26 percent probability that rates will be at 1.25-1.50 percent, 5.5 percent probability that rates will be at 1.50-1.75 percent, and 0.5 percent probability that rates will be at 1.75-2.00 percent.
November 1st meeting: Market is attaching 2 percent probability that rates will remain at 0.50-0.75 percent, 21 percent probability that rates will be at 0.75-1.00 percent, 40 percent probability that rates will be at 1.00-1.25 percent, 28 percent probability that rates will be at 1.25-1.50 percent, 8 percent probability that rates will be at 1.50-1.75 percent, and 1 percent probability that rates will be at 1.75-2.00 percent.
December 13th meeting: Market is attaching 1percent probability that rates will remain at 0.50-0.75 percent, 9 percent probability that rates will be at 0.75-1.00 percent, 28 percent probability that rates will be at 1.00-1.25 percent, 36 percent probability that rates will be at 1.25-1.50 percent, 20 percent probability that rates will be at 1.50-1.75 percent, 5 percent probability that rates will be at 1.75-2.00 percent, and 1 percent probability that rates will be at 2.00-2.25 percent.
The probability is suggesting,

1st hike of the year in March and the second hike in June. The third one is being priced in December.

The Australian bonds rebounded on the first trading day of the week as investors remain glued to watch the February employment report, scheduled to be released on March 15. Further, the 10-year bond yields have formed a ‘bullish gravestone doji’ pattern after two consecutive sessions of selling activity in the last week.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, plunged 3-1/2 basis points to 2.95 percent, the yield on 15-year note also dived 3-1/2 basis points to 3.34 percent and the yield on short-term 2-year traded 1-1/2 basis points lower at 1.91 percent by 04:40 GMT.

Australia’s unemployment rate unexpectedly fell in January, despite a plunge in full-time jobs, underscoring the mixed picture of the country’s labor market. The unemployment rate held below 6 percent partly due to discouraged job-seekers giving up the hunt, underscoring spare capacity in the labor market.

UK industrial output slows less than expected in January, but manufacturing and construction activity both shrank more than expected. Data released by the Office for National Statistics showed Friday UK industrial production decreased 0.4 percent in January compared to a 0.9 percent rise in December.

This was the first decrease since October 2016 and was less than expected fall of 0.5 percent. On a yearly basis, growth in industrial output eased to 3.2 percent in January, in line with expectations, and compared to 4.3 percent in December.

Both manufacturing and construction activities shrank more than expected in January. Factory output was down 0.9 percent in the opening month of 2017 against expectations of a 0.4 percent decline, while construction sector output dropped 0.4 percent compared to forecasts of a 0.2 percent fall, according to the Office for National Statistics.

The figures follow a strong end to 2016, and markets were anticipating a pullback. However, there is little evidence of a dramatic slowdown as Brexit talks loom, with the falling pound continuing to underpin exports.

“The data suggest the Bank of England will adopt an increasingly dovish view in coming months, with rhetoric highlighting the downside risks to the economy posed by rising inflation and heightened political uncertainty,” said Chris Williamson, Chief Business Economist, IHS Markit

The German 10-year government bund yields climbed to 5-week high on the last trading day of the week ahead of the Eurogroup Summit scheduled to be held later in the day. Also, a hawkish stance by the European Central Bank (ECB) in its monetary policy meeting held yesterday, drove prices lower.

The yield on the benchmark 10-year bond, which moves inversely to its price, jumped 2-1/2 basis points to 0.44 percent, the long-term 30-year bond yields surged 3 basis points to 1.26 percent and the yield on short-term 2-year bond traded 2 basis points higher at -0.84 percent by 08:10 GMT.

The ECB kept all policy measures unchanged at today’s meeting, which was in line with market expectations. However, Governor Mario Draghi had a hawkish tone during the Q&A session as he said the Governing Council discussed whether to remove the ‘lower levels’ from the forward guidance on policy rates.

Further, on the very short-end, German yield curve, Draghi said the ECB was monitoring distortions. The market reacted by sending German government bond yields higher by around 5bp beyond the 10Y point.

Lastly, investors will be closely eyeing the trade balance, due late today for detailed direction in the debt market.

President Donald Trump’s Treasury Secretary Steven Munchin has warned the both houses of congress in an open letter of the looming debt ceiling, which is expected to get hit on March 15th. The image of the letter is attached. In the letter he said that the suspension of the statutory debt limit which was done via a bipartisan budget act of 2015 will expire on March 15th of this year and from March 16th, the outstanding debt of the United States will be at the statutory limit. He warns that after that treasury will have to take up extraordinary measures to temporarily avoid defaults on obligations. He adds that after March 15th, it would halt sales of state and local government series (SLGS) and the suspension would continue until the debt limit is either increased or suspended.

Lastly, he encourages the congress to raise the limit at the earliest. President Trump has been critical of debt-ceiling increases in the past. In 2013, he had tweeted the followings,

“I cannot believe the Republicans are extending the debt ceiling—I am a Republican & I am embarrassed! Republicans are always worried about their general approval. With proposing to ‘ignore the debt ceiling’ they are ignoring their base.”

However, this time around, he is likely to support an increase.

President Donald Trump’s Treasury Secretary Steven Munchin has warned the both houses of congress in an open letter of the looming debt ceiling, which is expected to get hit on March 15th. The image of the letter is attached. In the letter he said that the suspension of the statutory debt limit which was done via a bipartisan budget act of 2015 will expire on March 15th of this year and from March 16th, the outstanding debt of the United States will be at the statutory limit. He warns that after that treasury will have to take up extraordinary measures to temporarily avoid defaults on obligations. He adds that after March 15th, it would halt sales of state and local government series (SLGS) and the suspension would continue until the debt limit is either increased or suspended.

Lastly, he encourages the congress to raise the limit at the earliest. President Trump has been critical of debt-ceiling increases in the past. In 2013, he had tweeted the followings,

“I cannot believe the Republicans are extending the debt ceiling—I am a Republican & I am embarrassed! Republicans are always worried about their general approval. With proposing to ‘ignore the debt ceiling’ they are ignoring their base.”

However, this time around, he is likely to support an increase.

China’s new yuan loans fell sharply in February from near-record levels in the previous month but were still higher than expected. Chinese banks extended 1.17 trillion yuan (about 169.2 billion U.S. dollars) of new yuan loans in February, down from 2.03 trillion yuan in the previous month, central bank data showed Thursday.

The People’s Bank of China (PBOC) has adopted a modest tightening bias in a bid to cool explosive growth in debt, though it is treading cautiously to avoid hurting economic growth. Analysts polled by Reuters had predicted new February yuan loans of 0.920 trillion yuan.

China’s new yuan loans remained relatively strong in February, led by long-term household loans and corporate lending. Household and corporate long-term loans, in combination, accounted for CNY982.2bn or 84% of overall monthly new yuan loans.

The M2, a broad measure of the money supply that covers cash in circulation and all deposits, grew 11.1 percent from a year earlier to about 158.29 trillion yuan. The M1, a narrow measure of the money supply which covers cash in circulation plus demand deposits, rose 21.4 percent year on year to 47.65 trillion yuan.

“We see little chance for monetary policy to return to easing. In addition, the PBoC should continue to re-shape the interest rate curve in the money market, with higher 7-day reverse repo rates and Medium-term Lending Facility (MLF) rates,” said ANZ in a report.

Speaking with the BBC, Scottish first minister Nicola Sturgeon said that she has not decided whether to push for another independence referendum but insisted that she is not bluffing with her demands to the UK government for special concessions for Scotland. Previously she had said that she has cast iron mandate as her party was overwhelming elected in the regional election and because in the last referendum it was publicized that only by remaining in the UK, Scotland would have access to the EU single market. Her government brought a litigation saying that the parliament in Scotland should have voting power over Article 50, which was denied by the highest court. She has repeatedly accused Prime Minister Theresa May’s government of overlooking her demands.

While she kept her Scoxit referendum date thinly veiled she seemed to be agreeing on the time suggested by her predecessor Alex Salmond, who resigned after losing the first referendum. The time suggested by him is autumn 2018. According to Ms. Sturgeon, the time suggested makes sense as the major outline of the Brexit deal would be clear by then.

Commodity markets are taking centrestageas oil had its largest one day fall (- 4.5%) in 13 months. Oil net long positions from the CFTC have been overextended since the start of the year, but it was the combination of technicals and ever more inventory builds in the US that gave investors the signal to take profit. Within G10, CAD has been, and should continue to be, more sensitive than NOK because leveraged market positioning is still very long CAD. CADJPY is sitting on its 100DMA, with a move below 84.20 marking a technical break. AUDUSD is about to break below its 100DMA at 0.75,helped by iron ore prices falling 9% from their peak, keeping us bearish on this pair. AUDUSD has bounced off the top end of a trend channel, bringing the bottom end of the channel at 0.7080 into focus. Even with expectations of a neutral Norges Bank next week (or essentially less dovish than last time), we stick with our tactical long USDNOK trade of the week.

Oil inventory data from the EIA showed a rise of 8.2mb to 528.4m, which is the highest in the data series going back to 1982. US producers appear to be ramping up production quickly, helped by stronger margins from high oil prices and relatively low funding costs. According to Reuters, producers in the red-hot Permian Basin in Texas are expected to increase production soon. An observation from our oil desk highlights the extent of the extreme technicals. They say that there hasn’t been a time in the last 30 years when the weekly front end Brent contract has been in such a tight range, trading sideways for three months. The longer that went on for, the more positioning stresses built up, explaining the sharp drop yesterday. The next formal OPEC meeting isn’tuntil May 25.

The DXY is still under performingtherisein positive US data surprises: Yesterday’s bumper ADP jobs estimate of growth of 298k in February beat market consensus of 187k. Our US economist has revised up his NFP expectation from 200k to 250k. Jobless claims hitting a series of record lows all year, combined with one of the warmest Februarys on record, has helped outdoor industries like construction do well. The market now prices a 100% probability of a hike in rates by the Fed next week, and so any USD strength needs to be driven by expectations of a faster pace of rate hikes in 2018.

JPY: Investors sensitive to US yields: Weekly security flow data for last week showed Japanese net selling of 1.13trn of foreign bonds. There will likely be some volatile data in the run-up to fiscal year-end (March 31) but we think there should be more focus put onto country reallocations for Japanese investors, with a potential to shift into higher-yielding assets. Yesterday the Nikkei reported that the Japanese Financial Services Agency will start to audit regional banks who have large exposures in foreign debt. In particular, concerns have been raised about losses made on US Treasuries. The benefits of USD rising versus JPY as US Treasuries sell off are not there if the bank is holding the foreign asset with an FX hedge. This story needs to be watched to see if changing governance may push Japanese banking sector investments locally instead of abroad. Thinking about that flow, it may actually still be bearish for JPY if it puts downward pressure on JGB yields or increases local lending. If the BoJ’s central bank liquidity turns into ‘high-powered liquidity’ as the banks lend more to businesses, this would help local inflation and thus weaken JPY. Selling EURGBP over the ECB: Today’s market focus will be on the ECB press conference and specifically how much more confident Draghi is about the recovery in inflation. Should the market, against our economist’s expectations, perceive today to be a hawkish outcome, then we think that EUR will trade in two stages. Initially EUR should rally as bond yields rise (with our limit being at 1.08). However, the bond yield rise may be disproportionate across the region, causing spreads to widen. The spread widening is not a good sign for the monetary union as it will highlight further the divergence in economic data performance. EUR should fall as markets realise this and EUR becomes inversely correlated with peripheral spreads. On the UK side, Nicola Sturgeon has suggested to the BBC that a second independence referendum in autumn 2018 would make sense but still stresses thatno final decision has been made. This story adds to our bullish GBP view since it may bring Theresa May’s approach to the Brexit negotiations away from the ‘hard Brexit’ and towards the middle to accommodate Scottish views. We think that Brexit risks are largely in the price and still like selling EURGBP, with a stop at 0.88.

Prime Minister Theresa May’s Brexit bill suffered a second defeat at the House of Lords after the lawmakers rejected last week an amendment with regard to the rights of the people of the European Union who are staying in the United Kingdom. Yesterday, by an overwhelming majority, 366 to 268, the lawmakers voted in favor of an amendment which gives the parliamentarians in the United Kingdom, the final say over the Brexit deal, which is expected to be reached over next two years after the Article 50 is triggered before March 31st this year.

The amendment was introduced by the Labor Party of the UK but the government had argued that it would be a threat to national interest. However, that didn’t prevent the amendment from securing a bipartisan victory. While Ms. May had verbally promised a vote to the parliament in her Brexit speech, the amendment binds her to make good on that promise.

The Brexit bill will now return to the House of Commons with the amendment forcing May to have a vote on her Brexit deal and another guaranteeing the rights of EU citizens. The government is working hard to pass the bill and trigger the Article 50 divorce clause by March 31st or the exit would become more difficult after that date. From April 1st, a country looking to exit the EU would need the support of 14 members of the 27 members group.