Dollar Chops About, As “Fairly Soon” Does Not Mean Mid-March

The US dollar is confined to narrow ranges today within yesterday’s ranges. Equity markets posted small gains in Asia and have an upside bias in Europe. Core bond yields are softer, and today this includes France, but peripheral European 10-year benchmark yields are 3-6 bp firmer. Italian bonds are the poorest performer, while the 10-year Dutch bond yields are off the most (3.2 bp to 0.56%) despite the looming election. Industrial metal prices are mostly lower for the third session, while an unexpected decline in the US API oil inventory estimate is helping underpin crude prices. 

The heavy tone of the Italian bonds follows yesterday’s EU warning to Italy, as we had flagged, due to its structural deficit. The center-left PD could decompose, with a few parts of the coalition going running their own candidates. This self-immolation is seen as increasing the likelihood of the populist-nationalist party coming to power.  

At the same time, the dismal retail sales report is a good reminder that Italy’s debt challenges on the sovereign level are not simply the function of excess spending in the past, though that is part of it, the miserably slow growth. December retail sales were expected to rise 0.2% in December for a 0.9% year-over-year gain. Instead, they fell 0.5% and put the year-over-year rate at -0.2%. The year-over-year rate in December 2015 stood at 0.7% and 0.1% in December 2014. 

Politics is also very much in the air in the UK. Yes, the bill to begin negotiating the amputation is making its way through the House of Lords. It is expected to be formally triggered in the next few weeks with the Malta summit being a likely venue in early March. But the issue today is two by-elections.In particular, a defeat for Labour may embolden another challenge to the party’s leadership. Copeland, in Northern England could be won by the Tories. If so, it would be the first time since 1982 that the government took a seat in a by-election from the opposition. If that were not a sufficient insult, UKIP may take the seat in Stoke-on-Trent.It was one of the strongest Brexit votes.