On FX markets, EUR/USD remains well bid

Market

There were hardly any (US) data with market moving potential yesterday. If anything, the NY Fed 1-year inflation gauge again drifted marginally higher (3.13%). US officials, including Donald Trump, also abstained from ‘high profile’ comments. Still, it didn’t change markets’ assessment. The unwinding of the US exceptionalism trade continued and even intensified. Major US equity indices declined between 2.08% (Dow) and 4.0% (Nasdaq). The latter cleared the 17468 support (23% retracement rally 2022/24) and reached the target of the ST multiple top formation (neckline 18831). A clear warning signal. Powell’s ‘guidance’ last Friday, that the Fed won’t be carried away by one or two softer data to remove its wait-and-see stance didn’t impress markets. US yields declined between 11.9 bps (5-y) and 5.7 bps (30-y). The US 2-y yield revisited last week’s correction low near 3.84%. Markets are moving further into 75 bps + territory regarding this year’s Fed rate cut expectations. Yields at longer maturities didn’t really test the ST lows. The decline in US yields and steepening of the yield curve in the first place probably mirrors market uncertainty on the impact of the Trump chaos on ST growth and the need/hope for the Fed to come to the rescue at some point. At the same time an ongoing underperformance/bottoming out of yields at longer maturities at some point also might be an indication of the market questioning the LT US (economic and political) credentials. Whatever one sees as the reason for yesterday’s ‘sell USA repositioning’ (cyclical or structural) it also prevent the dollar from taking up its (usual/previous?) safe haven role. DXY closed little changed near 103.9. Idem for EUR/USD (close 1.0834). The safe haven role, if any, was taken up by the Japanese yen, with USD/JPY briefly dropping below the 147 big figure. Regarding the European side of the global repositioning, the German Greens ‘rejecting’ the proposed reform of the constitutional debt brake (cf infra) maybe to some extent tempered the rise in German/EU yields. Still German yields (2-y -3.1 bps; 30-y +0.7 bp) held up remarkably well given the sharp decline in the US.

Asian equity indices this morning mostly show losses of up to 1.0%/1.5%, with trading still developing rather orderly given yesterday’s WS sell-off US. US yields tentatively stabilize (minus 1/2 bps) , but nothing more than that. The dollar struggles to prevent further losses (DXY 103.7, EUR/USD 1.086, USD/JPY 147.3). Later today, the eco calendar ‘in normal times’ would be assessed as containing only second tier releases with only the US NFIB small business confidence and the JOLTS job openings scheduled for release. However, in current environment, negative surprises might further fuel the reversal of the ‘US exceptionalism trade’. In Europe, the objections of German Greens at least isn’t seen as profoundly changing the new framework of fiscal stimulus. The Bund future is again drifting lower. On FX markets, EUR/USD remains well bid. Las week’s correction top (1.0889) stays within reach with only 1.0937 (Nov top) last intermediate resistance on the path to a complete reversal to the 1.1214 2024 top.

News and views

The German Green party presented a counter-offer after indicating that they wouldn’t support Chancellor-to-be Merz’s proposed constitutional reforms to raise deficit spending via the outgoing parliament (new Bundestag gets seated on March 25). The Greens want to raise the threshold for defense spending exemptions from debt rules to 1.5% of GDP instead of the 1% proposed by Merz. They don’t seem to have an issue with the two other pillars of the plan, setting up a €500bn infrastructure fund and loosing states’ fiscal rules. The main bills are interconnected and probably need to pass together through parliament. Afterwards, the Bundesrat, representing the states also needs to approve proposed legislature with a 2/3rd majority. Some more horse-trading will be needed as CDU/CSU/SPD/Greens lack the numbers in two of the 16 states.

UK consumer spending lost momentum in February after a bounce in January. Sales at member stores of the British Retail Consortium rose by 1.1% Y/Y, down from 2.6% Y/Y in January. BRC CEO Dickinson said that the weak performance makes many retailers uneasy, especially as they brace for GBP 7bn of new costs from the Budget and packaging levy in 2025, as well as the potential impact of the Employment Rights bill. The industry is already doing all it can to absorb existing costs, but they will be left with little choice but to increase prices or reduce investment in jobs and shops, or both.

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