Global core bonds were little effected yesterday

Rates

Global core bonds were little effected yesterday amid the busy calendar. The ECB kept policy unchanged, but Draghi explicitly mentioned QE as a potential tool to ease policy further. The US non‐manufacturing ISM was close to expectations and unable to push the US 10‐yr yield above 2.80%. At the end of the session, changes on the German yield curve ranged between ‐2.1 bps (5‐yr) and +0.1 bp (30‐yr). In the US, the 5‐yr yield added +0.3 bps while the 30‐yr yield dropped 1.9 bps.

The remarks by the ECB were clearly intended as a form of ‘verbal easing’ but they also likely reflect a significant view within the Governing council that in spite of some positive signs in relation to economics activity, downside risks remain substantial and may need to be countered. The press statement made it clear where the ECB’s priorities lie at present by noting: “We are resolute in our determination to maintain a high degree of monetary accommodation and to act swiftly if required. Hence, we do not exclude further monetary easing…”. For a full review of the ECB meeting, see our Flash report.

Today, the focus turns to the US payrolls report. Apart from the payrolls, the eco calendar is thin with only German factory orders and the second‐tier retail PMI. The ECB announces the 3‐yr LTRO repayment.

After very poor reports in both December and January, the February payrolls report showed cautious signs of improvement, although weather conditions continued to weigh on hiring. In March, weather conditions improved further, but several sources reported still below par temperatures in some states. The consensus however is looking for a decent gain by 200 000 in March, up from 175 000 in the previous month and the highest level since November last year. Both the ADP report and jobless claims data showed an improvement in labour market conditions in March, but confidence indicators remained mixed, suggesting that it might take several months to fully recover from the weather dip. Nevertheless, some payback is likely, but it is uncertain whether it will come in March or in April. We believe however that the risks are for an upward surprise as we expect less poor weather conditions to have boosted hiring. Regarding the unemployment rate, the consensus is looking for a drop to 6.6% in March, reversing the previous month’s pick‐up. We have no reasons distance ourselves from the consensus. Also earnings data are interesting, but only a limited 0.2% M/M increase is expected. Hours worked, on the contrary, should have improved following a weather related drop in February. Finally in Germany, factory orders are forecast to have increased slightly, by 0.2% M/M in February, after a stronger 1.0% M/M increase at the start of the year.

Overnight, Asian equities trade mixed but daily changes are small between +0.5% and ‐0.5%. The US Note future trades flat, suggesting a neutral opening for the Bund.

Today, all attention goes to the US payrolls report. For the US 10‐yr yield it seems like a make‐or‐break moment. Since the ‘hawkish’ talk of Fed president Yellen at the previous FOMC meeting, momentum has been building for higher rates. This week’s previous eco data, both ISM’s and ADP, were strong but no outliers and close to consensus. Nevertheless, the drive for higher yields remained and today’s payrolls report should be the climax which pushes the 10‐yr yield over the 2.80% bar and paves the way for return action towards 3%. A strong figure is expected, 200k, but we still see risks for an even better outcome. Overall, we believe anything close to or above consensus will be enough to push bonds lower/rates higher.

Technically, the US Note future fell below 123‐02+ support following the strong ADP report, a first sign that the technical picture is deteriorating. Once the US 10‐yr yield trades north of 2.8%, the path towards the 121‐ 08+ contract low is completely open. For the Bund and the German 10‐yr yield, important support (141.20) and resistance (1.70/75%) levels are still further away, but could rapidly come within reach if US yields start a new upleg. Yesterday’s verbal easing by the ECB was easily shrugged off.