Markets fall as virus spreads
The Bank of England’s Jon Cunliffe stated UK domestic inflation is weak despite cost pressures and the bank shouldn’t rush to conclusions as the key question was how much is cyclical and how much structural. He did forecast inflation from the labour market and domestic cost pressures pushing inflation slightly above the 2% target. Sterling was undermined yet more decline in global risk appetite and concerns over global trade flows.
The UK government issued a warning that if there is no broad outline of a deal by the end of June it could terminate UK/EU trade talks. The warning shot weakened Sterling sentiment month end flows saw more money flowing into the Euro from Sterling. The Euro strengthened through 1.1765 and the Pound dipped to 1.2860 despite Dollar weakness. UK consumer confidence edged to an 18-month high in February but the Pound was little changed with global risk conditions taking precedence.
According to the second reading, US GDP was unrevised at 2.1% for the fourth quarter with an upward revision to consumer spending. Jobless claims increased to 219,000 in the latest week from 211,000 previously. Durable goods orders declined 0.2% for January following a revised 2.9% increase the previous month with the underlying increase of 0.9% above consensus forecasts of 0.2%. The data releases had little overall impact with markets focussing on risk conditions. As equity markets continued to decline, there was a further repricing of US interest rate expectations.
Federal Reserve (Fed) Funds futures indicated that the chances of a rate cut at the March meeting had increased to near 70% with strong expectations of two rate cuts by July. The shift in interest rate expectations undermined the dollar with the Euro pushing above the 1.1000 level for the first time in 3 weeks.
Latest Eurozone confidence data recorded an improvement to 103.5 for February from 102.6 the previous month with businesses and consumers more optimistic over the outlook, but coronavirus concerns will inject further uncertainty. German yields declined on the day as the German DAX index declined by over 3%. There was also a shift in money markets with futures markets pricing in a 10 basis-point cut in benchmark rates at the July meeting. The Euro did, however, gain some protection from the strong current account position and the ECB appeared in no rush to adjust monetary policy.
As of writing, the Euro is trading at 1.1015 against the Dollar.
Data to watch
All Day – EUR – German Prelim CPI
13:30 – USD – Core PCE Price Index
13:30 – USD – Personal Spending
14:45 – USD – Chicago PMI