Yesterday, German Bunds showcased a robust performance, outshining US Treasuries, primarily driven by milder-than-expected Spanish Consumer Price Index (CPI) figures and dovish remarks from Italian ECB board member Cipollone. Cipollone’s comments hinted at the European Central Bank’s (ECB) potential swift rate reduction strategy to bolster the economy amidst easing inflationary pressures.
The response was notable in German yields, which saw a decline ranging between 5.8 basis points (bps) for the 5 and 10-year bonds and 4.3 bps for the 2-year bonds. In contrast, US yields experienced a modest retreat, with declines ranging between 2.3 bps for the 2-year bonds and 4.7 bps for the 30-year bonds. Additionally, the $43 billion 7-year US Treasury auction proceeded smoothly, indicating market stability.
Equities received a boost from the further easing of financial conditions, with the Dow Jones Industrial Average surging by 1.22%. However, the dollar exhibited marginal gains, with the Dollar Index (DXY) closing at 104.34 and the EUR/USD pair at 1.0828. Notably, the USD/JPY pair at 152 remained a crucial threshold for potential Bank of Japan (BoJ) interventions. Despite modest gains, the yen closed at USD/JPY 151.33, reflecting a fragile market sentiment.
Post-US market closure, Federal Reserve’s Waller delivered an update on his previous remarks titled “What’s The Rush,” emphasizing a cautious stance on rate adjustments. Waller noted the continued strength in economic output and the labor market, coupled with a slowdown in inflation reduction progress. Despite signs of economic growth deceleration, evidence of a significant slowdown remains scarce, with the labor market still adding jobs at a brisk pace.
Waller’s analysis highlighted a deceleration in shorter-term inflation measures, indicating a potential stall or slowdown. He expressed the need for consistent improvement in inflation data before considering rate cuts to maintain the economy’s path towards 2% inflation.
Looking ahead, the economic calendar includes US weekly jobless claims, the MNI Chicago PMI, and pending home sales. German retail sales disappointed with a 1.9% month-on-month decline. Belgium and Portugal will publish February inflation data, while France, Germany, Italy, and the US will release their Personal Consumption Expenditure (PCE) deflators tomorrow.
Waller’s remarks are anticipated to provide support for US and Eurozone yields while potentially benefiting the dollar, particularly as EUR/USD approaches the critical 1.08 support level. However, Waller’s cautious approach suggests a first Fed rate cut in June appears premature, especially with base effects indicating a potential upward drift in inflation over the next few months.
