Euro takes a little ground

The euro firmed up against the dollar and sterling during the first day of the week. The single currency rose slightly to around $1.0860 currently to the dollar from $1.0825 yesterday morning and against Sterling it also made a small gain to 85.5p though EURGBP has been trading in a tight range 85p for all of February. As a result of those moves yesterday, sterling ticked up slightly to the dollar to about $1.2690 at the moment.

In government bond markets, prices fell with rates rising across the board. US 10, 5, and 2-year yields were up by nearly 5ps each taking the former to just under 4.3% from under 4% at the start of the month. In Europe, it was similar with German yields up 7-8bps apiece taking the 10-year yields to c.2.45% (from c.2.2% at the start of the month) and in the UK 10-year gilts were up 5bps to 4.15% (from 3.8%). Yields, however, are reversing course a bit this morning with 10-year yields in the US and Europe sliding back on the open this morning.

After positive – albeit largely tech and AI specifically driven – move last week, equities gave up some ground at the start of this week. The S&P was down 0.4% on the day and the Eurostoxx gave up 0.2% while the FTSE also weakened, losing 0.3%.

The US housing market got a boost at the end of last year and into 2024 when longer term mortgage rates fell back in anticipation of the Fed moving to cut rates later this year. That helped new home sales get off to a positive start in January rising 1.5% month-on-month following a 7.2% rise in December after consecutive monthly falls in the previous two months. However, with more supply coming into the market the price of new homes in annual terms fell again in January for the fifth consecutive month and with mortgage rates ticking up again – with the Fed appearing to be in no rush to raise rates – the momentum in the market could burn out quickly.

In the UK, CBI retail sales report contained some slightly more positive signs for the poorly performing retail sector. The reported retail sales balance, indicting sales compared to one year ago, came in at -7 in February from -50 in January when balance of around -30 was expected. While activity is still weak, this is the shallowest pace of decline in 10 months. In addition, inflation pressures are easing with the balance for selling prices coming in at +54, down from +73 in November. While the figures are somewhat better, retailers are still pretty pessimistic about the future and the survey showed many think sales will decline at a sharper pace in March and are still planning to reduce employment and investment in the period ahead.

In Germany, the GFK consumer confidence, though improving, remained at a relatively low ebb coming in at -29 in March from -29.6 in February. The German economic outlook is for a possible contraction in Q1 and sluggish growth after that and consumers appear to have taken this on board and are worried about their own finances and the outlook for the economy. Consumer spending in Germany was weak all of last year and is estimated to have declined by about 0.7% in 2023.

ECB President Lagarde was out once again yesterday, this time talking to the EU parliament, repeating that ECB was awaiting more data before making a move. She told lawmakers that the current disinflation process is expected to continue but the Governing Council needs to be ‘confident’ it will lead sustainably to the 2% target. She said the labour market and wage pressure remains strong and the economy should pick up later this year. Lagarde said last week that slower wage growth in Q4 was encouraging but that labour agreements and wage data in Q1 would be important for the Council in making its decision. In addition, there were comments from Greek Governing Council member Stournaras who said that while ECB remains data dependent, there has been ‘substantial’ progress in reducing inflation which would ‘very likely’ be near target by autumn. He said this had been achieved without a recession or financial instability which he viewed as a soft landing. He stated he currently thinks June would be a good starting point to begin easing rates and he favours steps of 25bps once that begins.

Meanwhile, Federal Bank of Kanas President Schmid was out to say he believed that the FOMC should be ‘patient’ and there is no need to ‘preemptively adjust the stance of policy’. He said the US is ‘not out of woods yet’ when it comes to high inflation and that a moderating labour market with easing wage growth would likely be needed to restore price stability in the services sector. He added that he would not halt the reduction in the Fed’s balance sheet and that goal should be the priority once the current crisis had passed. Schmid only became Bank of Kansas President about six months ago but these comments suggest he will be one of the more hawkish members of the FOMC when he takes up his one-year rotating voting spot on the committee in 2025. He replaced Esther George at the Kansas bank, who was also a noted hawk.

On the agenda today we get US durable good orders, house market data and conference board sentiment. On the speaker front, we have ECB’s Elderson, BOEs Ramsden and Fed’s Barr due out.