In a big house it’s easy to get lost as the maze of rooms lead to many different exits. This is the lesson for the markets today as they watch central bankers and the UK Parliament. The focus of markets is back to rates and the policy prognostications from central bankers as the level of negative yielding bonds rises over $10 trillion. Markets are unsettled still though modestly stable even with economic data less rosy than yesterday - albeit second-tier in status as UK BBA mortgage approvals drop to 6-year lows, with German consumer climate dropping for the first time in 5 months, with the BOJ minutes revealing a concern about the VAT and global demand hits,  with French GDP revised to 2% in 4Q but lower for 2018 and with confidence higher for business led by wholesale trade, flat or lower elsewhere. The overall focus is on politics first with the big House of Parliament firmly in control leaving markets in a wait-and-see mode, followed by the central bankers as they play games with markets as they wait-and-see about economic data and market stability. 

• UK Brexit – timelines – Letwin amendment passes, Parliament seizes control of process, usurping PM, focus is on cross-party backbench talks, various options for Brexit to be voted on with run-off next Monday, PM May to address 1922 committee tomorrow – with some talk of resignation plan. 
• Turkey volatility – 5.50 pivot.  The early drive for stronger TRY denied, interest rates O/N to 1 week in FX over 100% as Turkish banks appear to be keeping swaps below 25% central bank limit. 
• Hungary rate hike risk – moving from -0.15% to -0.5% expected.  The real surprise maybe in the news conference that follows and breaks tradition.  

The point of these stories maybe in the fact that rates are moving more than FX markets as the traditional shock absorbers for capital flows and economic policy stress are lost in the decade of QE. The ride for investors will be bumpy and the implications for the G10 FX volatility dire unless something bigger happens in US/China trade or UK Brexit. Until then we all are watching the USD tight range and fear for a meltdown from 95.85.

Question for the Day: Is the US term premium collapse about the ECB or about the economy or something else? The US term premium calculator trades -78bps for 10Y – some say this is a record back to the 1960s, others see the 2016 level – either way – the story of US rates is a key focus as bonds are lower as FOMC speakers talk about twisting the balance sheet with Harker and Rosengren both mentioning this possibility. Sometimes the simple story is best. The FOMC policy shift to neutral is the first reason for bond yields lower, but the shift in balance sheet plans and the lack of inflation fears are the other key stories. Risk fears for a recession and global discord is a third factor at play and that is where the ECB and BOJ and BOE policies collide to play a role. Overall, watching the swap rates and the term premium today maybe essential to understanding market signals and risk appetites.   

What Happened?

• RBA Ellis: Labor market has “unambiguously” improved. In her speech, “What’s up (and Down) with Households?” the assistant governor Ellis highlights the key offset to housing distress, jobs and the expectation for higher wages. Here is her key point: “Along with other countries, it's taking longer and a lower unemployment rate to start seeing faster wages growth than historical experience might have suggested. Indeed, we still think Australia is a little way off the levels of the unemployment rate that would induce materially faster wages growth…”
• BOJ Summary of Opinions: Global concerns spark debate for more easing.“In the current situation where downside risks are materializing, the BOJ should be prepared to make policy responses,” one of the central bank’s nine board members was quoted as saying. “If there are concerns that the inflation momentum will be lost, the BOJ should ease policy decisively,” the member said. Most of the board maintained the view that Japan’s economy was expanding moderately, though a few worried about global demand impact and the potential hit to consumption from the October VAT hike. 

• German April GfK consumer confidence seen dropping to 10.4 from revised 10.7 – weaker than 10.8 expected. March revised lower from 10.8. The April drop is the first pullback for 2019. Propensity to buy declined in March in the wake of decreasing income expectations. Following a decrease of 3.4 points, the indicator currently stands at 50.2 points. This is the lowest value for more than two years. The last time a worse value was measured was in December 2016 at 48 points. However, the Economic expectations indicator rose by 7 to reach 11.2. Prior to this, it had fallen five times in a row. The coming months will show whether this is the start of a reversal of the trend. Overall, the economic mood has lost nearly 35 points over the last 12 months. 

• UK February BBA new mortgages drop to 35,299 from 39,555 – weaker than 39,600 expected – worst in 6-years. Brexit concerns were highlighted in the report. Net mortgage lending rose by GBP711mn down from GBP801mn in January. Overall consumer credit growth also slowed, rising by 3.8 percent compared with February last year, the smallest increase since October.
• French 4Q final GDP unrevised at 0.3% q/q, but up 2% y/y – better than 1.8% y/y expected.  However, the full-year 2018 growth cut to 1.5% from 1.6% - down from 2.3% y/y in 2017. The French budget deficit fell to 12-year lows of 2.5% in 2018 – better than the 2.6% forecast and down from 2.8% in 2017. 

• French March business confidence rises to 104 from 103 – better than 103 expected. All sectors were stable or higher from services (103 flat), retail trade (102 flat), manufacturing (102 from 103) and construction (112 from 111). Notably, it has bounced back by 8 in wholesale trade to 107, compared to the bi-monthly survey of January. The business climate is above its long-term mean (100) in all those sectors. Employment rose to 108 from 107. 

Market Recap:

Equities: The S&P500 futures are up 0.45% after losing 0.08% yesterday. The Stoxx Europe 600 is up 0.45% recovering from 0.5% losses yesterday. Asia markets were mixed with MSCI Asia Pacific up 0.3% as Samsung warned on 1Q, Japan bounced led by transport and real estate, China fell with bank worries in play as ICBC CCB reporting Thursday, BOC Friday. 

• Japan Nikkei up 2.15% to 21,528.39
• Korea Kospi up 0.18% to 2,148.80
• Hong Kong Hang Seng up 0.15% to 28,566.91
• China Shanghai Composite off 1.51% to 2,997.10
• Australia ASX up 0.07% to 6,213.10
• India NSE50 up 1.14% to 11,483.25
• UK FTSE so far up 0.3% to 7,198
• German DAX so far up 0.1% to 11,358
• French CAC40 so far up 0.5% to 5,289
• Italian FTSE so far up 0.35% to 21,137

Fixed Income: Bonds are mixed globally as markets take profits as risk-appetites stabilize. Sales overnight were focus as the US 2Y supply will be later. German 10Y Bund yields are flat at -0.02%, French OATs flat at 0.36% while UK Gilts up 2bps to 1% as Brexit deal hopes rise again. Periphery is mixed with Italy flat at 2.50%, Spain up 1bps to 1.12%, Portugal up 1bps to 1.31% and Greece up 2bps to 3.79%. 

• Germany sold E4bn of 0% 2Y Schatz at -0.57% with 1.8 cover – previously sold E5bn at -0.54% with 1.59 cover. 
• UK DMO sold GBP325mn of 30Y 0.125% Aug 2048 linked Gilts at -1.964% real yield (183.56 price) with 2.18 cover-up from 2.12 previously and 2.11 quarter average, but overbidding was just 0.7 compared to 76.3 previously and 30 quarterly average. 
• Italy sold E0.92bn of 10Y 1.3% BTPei with 1.54 cover and 97.23 price– less than the 1.65 previously and down from the 2.04 quarterly average. Overbidding was down by 4.7%. 
• US Bonds are lower in bear curve flattening post Fed speakers, into 2Y sale – 2Y up 4bps to 2.29%, 5Y up 3bps to 2.23%, 10Y up 3bps to 2.45% and 30Y up 3bps to 2.90%. 
• Japan JGBs sold with bear steepening trade with eye on BOJ/US swaps– MOF sold Y399.2bn of 0.8% 40Y JGBs at 0.61% with 3.5 cover – previously 0.74% with 3.79 cover.  2Y up 2bps to -0.16%, 5Y up 2bps to -0.17%, 10Y up 2bps to -0.06%, 30Y up 4bps to 0.54%
• Australian bonds are sold across board – waiting for more data– Australia sold A$150mn of 0.75% Nov 2027 linked bonds at 0.27% with 3.7 cover.  3Y up 5bps to 1.45%, 10Y up 5bps to 1.82% while NZ 10Y off 4bp to 1.89% with focus on RBNZ tonight.
• China PBOC skips open market operations for 5thday– net drains CNY50bn. Bond rally sharply – 2Y off 1bps to 2.66%, 5Y off 3bps to 2.98%, 10Y off 3bps to 3.09%.

Foreign Exchange: The US dollar index off 0.15% to 96.47. Emerging markets are mixed – EMEA: ZAR off 0.4% to 14.359, RUB off 0.3% to 64.172, TRY up 0.6% to 5.5140 while ASIA: KRW off 0.15% to 1133.30 and INR flat at 68.867. 

• EUR: 1.1325 up 0.1%. Range 1.1303-1.1326 with 1.1250-1.1420 still key. Brexit/equities/rates driving
• JPY: 110.35 up 0.35%. Range 109.91-110.43 with 109.80-110.80 focus and with EUR/PY 124.95 up 0.4% reflecting equity bounce back – BOJ still watching. 
• GBP: 1.3240 up 0.3%. Range 1.3158-1.3251with EUR/GBP .8560 off 0.2% - Choppy markets with Brexit plays driving – some deal in making, politics unclear 1.31-1.3350 keys
• AUD: .7130 up 0.25%. Range .7107-.7135 with NZD .6905 off 0.1%. Focus is on commodities, equities, .7050 base with NZD RBNZ dovish tilt expected. 
• CAD: 1.3390 off 0.1%. Range 1.3380-1.3417 with 1.3380-1.3450 looking less sure and 1.3250 in play if US data/FOMC speakers sound more dovish. 
• CHF: .9925 flat. Range .9916-.9937 with EUR/CHF 1.1240 up 0.15%. Less fear more CHF weakness - .9880 key for $. 
• CNY: 6.7130 up 0.1%.Range 6.7010-.67140. Going nowhere fast - PBOC fixed 6.7042 down from 6.7098 yesterday. 

Commodities: Oil up, Gold off, Copper off 0.3% to $2.8840. 

• Oil: $59.57 up 1.25%.Range $59.04-$59.65 with Venezuela (Russia troops) and equities bid (German IFO) running into US API tonight. $58-$60 still key for WTI. Brent $67.78 up 0.85%. 
• Gold: $1314 off 0.65%.Range $1313.40-$1323.00 with $1325 capping and USD/rates key still. Silver $15.46 off 0.7% - $15.50 pivot stil. Platninum $851.60 off 0.7%. Palladium $1535.80 off 0.5%. 

Conclusions: Which Curve. The inversion of the 3M to 10Y US curve has spiked the risk of a recession from 20% to 45% according to most prognostications. The question about what curve matters is on the rise with the 5Y to 30Y steepening steadily. 

This curve matters as its part of the housing and mortgage story. The bounce back in existing home sales last Friday puts the focus on housing starts today and prices. The FHA is worried about credit and has flagged more loans as high risk according to the WSJ report yesterday. This reverses the easing of conditions from 2016. The FHA $1.3trn insurance portfolio has a large share of non-bank mortgages. Last year almost ¼ of all the FHA insured mortgages had debt-to-income ratios over 50%. Throw in that average credit scores are now 670 – worst in a decade and down from 700 in 2011 – and the FHA concern looks rational albeit ill-timed. 

Economic Calendar:

• 0800 am Phil Fed Harker speech
• 0830 am Boston Fed Rosengren speech
• 0830 am US Feb housing starts (m/m) 18.6%p -6.7%e / 1.23mn p 1.218m e
• 0900 am Brazil COPOM meeting minutes
• 0900 am US Jan FHA house prices (m/m) 0.3%p 0.3%e
• 0900 am US Jan S&P/Case-Shiller house prices (y/y) 4.2%p 4.1%e
• 1000 am US Mar Richmond Fed manufacturing 16p 12e
• 1000 am US Mar Conference Board consumer confidence 131.4p 132e
• 0100 pm US 2Y note sale
• 0430 pm US weekly API oil inventory -2.133mb p +1mb e