Dollar Can’t Extend Yesterday’s Gains, Month-End Consolidation

The dollar’s gains scored yesterday are being consolidated now, giving it a somewhat heavier tone. Equity markets are mixed, consolidating this week’s gains. Bond markets are also mostly quiet.  

There are a couple of exceptions. Sweden reported Q4 GDP of 1.1% quarter-over-quarter, which is twice the consensus expectation. The Q3 growth of 0.3% was revised higher to 0.5%. The positive momentum spilled over to the January retail sales report, where sales jumped 1.2% fully recouping December’s 0.6% decline.  

The lowflation, and now outright deflation (January CPI -0.2% year-over-year) has not hobbled the economy.  And that is what the retail sales figures mean is that Swedish consumers are not hunkering down anticipating lower prices in the future. On the other hand, it is the deflationary conditions that prompted the Riksbank to adopt negative deposit rates and initiate a small bond buying program. Today’s data suggest the Riksbank will not be in a hurry to extend current accommodative efforts.  

The krona is the strongest currency today with a 0.8% rise against the dollar. This is sufficient to turn higher on the week against the US dollar, which is up against most currencies. The krona has gained nearly 2% against the euro this week. The euro had tested the SEK9.70 level toward the middle of the month and is now finishing around SEK9.36, close to where it began the month.  A trend line, connecting last October and the January lows comes in near SEK9.32 today.  

While core bonds have a heavier bias today, the peripheral bonds have continued to rally and benchmark yields are at record lows. Eight eurozone members saw record low 10-year yields yesterday and today” Germany, Netherlands, Austria, France, Italy, Finland, Portugal and Ireland.  Germany sold five- and seven-year bonds this week with negative yields. This week Italy and Portugal sold new bonds at record low yields. The spread compression continues as well. The Spanish premium, for example, over Germany on 10-year yields has fallen below one percent this week (now 92 bp on the benchmarks) for the first time since 2010. Italy’s premium is also slipping through one percent today.