German CPI Higher Than Expected, but Bunds Still Draw Bid

German March inflation surprised to the upside. The 0.5% rise in March translates into a 1.1% year-over-year rate (EU harmonized measure 1.3%) This is the highest since Nov 2008. It appears, in part, to reflect higher energy and commodity prices, which in turn could be reflecting in part the euro's pullback in recent months. The increase in food and clothing prices cold also be reflecting the impact of the poor weather.

Nevertheless, German bunds are still well bid here with ten year yields slipping 3 bp. Confirmation that true to form, Greece will take advantage of the good news stream to raise funds is weighing on Greek bonds. The 10-year spread has widened by 11 bp to 315 bp. Greek officials have said this is prohibitive, but exactly where the pain threshold is, is difficult to say. Reports suggest Greek officials know that the 30 bp premium over Germany of a few years ago is not do-able, but they seem to have their sights set on Irish yields which are about 173 bp less than Greece (on 10-year maturities).

The US market does not appear as enthusiastic toward the euro as the European session. Still as the euro approached the Asian low (low in North America has been just below $1.3440 vs Asian low of about $1.3420) new buying has emerged.

We favor the euro's upside until the middle of the week. With rising US interest rates, and strong auto sales and jobs data expected at the end of the week and uncertainty still lingering in Europe, the market may be reluctant to more than marginally adjust positions. The $1.3550-70 area seems like a reasonable target, corresponding to retracement objective and just below the 20-day moving average.