The eco calendar is empty and attention will go to central bankers

Rates

On Friday, global core bonds bounced higher on the back of short covering following the US payrolls report. In the days before the release, the bar was raised high and the strong, but close to consensus, outcome was insufficient to satisfy investor’s hopes. The repositioning (profit taking) was not limited to the bond markets. The combination of strong payrolls and a rising participation rate stimulated the idea that the Fed may go slower than thought (decline in unemployment rate may slow). In this respect, the outperformance of the belly, hit most ahead of the payrolls, is no surprise. US yields were down about 4 bps at the wings, while the 10-yr yield shed 7.6 bps and the 5-yr 9.9 bps. German bonds mirrored the price action of the US Treasuries, with yields up to 5.6 bps (5-yr) lower. Worth mentioning, according to the FAZ, the ECB ran simulations to calculate the impact of a €1000B QE programme over 1 year. Its impact would push the inflation up between 0.2%- and 0.8%-points. The article extended the Bund’s gains while peripheral bond markets profited. Spreads versus Germany narrowed around 3-4 bps with Portugal outperforming.

After this morning’s German production data, the eco calendar is extremely thin today, both in the US and euro zone. ECB governors are active today with Mersch, Nowotny, Weidmann and Constancio scheduled to speak and also Fed’s Bullard will take the stage. Later this week, the eco calendars remains fairly thin and little eventful. Besides central bankers, attention also goes to the US mid-month refinancing and some EMU auctions (see below). Tomorrow, after market closure, Alcoa also kicks off Q1 earning season.

The ECB meeting last week was very interesting, as the ECB clearly moved closer to a further easing of policy, maybe via unconventional measures. The FAZ revealed that the ECB had even done some simulations. However, a lot of uncertainty still exists on the subject. In this respect, we listen carefully to ECB governors to get clues about what they consider unconventional tools (not all governors may have the same understanding). What is the trigger? When can it eventually be introduced and how will it be implemented? Mr. Draghi suggested that the EMU needed another form of QE as it has a banking-centred financial system instead of a market-centred one like in the US. He however pointed to difficulties in the modelling of such programme. So, we deduced that the ECB is not ready to implement a US QE-like programme. However, the ECB also signalled that it was not necessary done with conventional measures (rates). Is this to bridge the period to the use of unconventional tools? A lot of key questions on which we might get some hints throughout the speeches of governors. Markets will be very attentive.

St-Louis Fed Bullard spoke a few times in recent days and thus might not have much impact anymore. We retain that he has become very hawkish and sees a first rate hike in early 2015 and a 4.25% FF rate by the end of 2016. This is surprising as last year he was very dovish as he had fears for too low inflation.

This week’s EMU issuance calendar is heavy. Tomorrow, the Netherlands and Austria kick off. The Dutch debt agency taps the on the run 5-yr DSL (1.25% Jan2019) for up to €3B. The Austrian treasury sells the on the run 10-yr RAGB (1.75% Oct2023) and the on the run 30-yr RAGB (3.15% Jun2044) for a combined €1.21B. On Wednesday, the German Finanzagentur taps the on the run 2-yr Schatz (€4B 0.25% Mar2016). On Thursday, Ireland holds its second “regular” bond auction since exiting the bailout programme and on Friday, the Italian debt agency concludes with normally a tap of the 3-yr, 7-yr and one long dated BTP (announcement on Tuesday). This week’s auctions will be supported by a €19B Bund redemption.

Overnight, Asian equity indices trade negative, but much less than WS Friday. Japan underperforms on the back of a stronger yen. Chinese markets are closed for Tomb Sweeping Day. German industrial production is reported close to consensus and shouldn’t play a big role. The US Note future is slightly higher.

Today, the eco calendar is empty and attention will go to central bankers. Following last week’s ECB meeting and Friday’s rumours of a €1T QE-programma, we look out whether ECB governors will add to the dovish rhetoric. Mersch, Nowotny, Weidmann and Constancio are on the agenda. In the US, Fed Bullard speaks on monetary policy. He is currently the most hawkish FOMC governor and we don’t expect surprises from him. Apart from these speeches, some follow-up action on the payrolls and on the QE-rumours could also be in the cards.

Technically, the US 10-yr yield failed to break north of 2.80% after the in line with consensus payrolls. Given the relative thinness of the agenda this week, we believe the US 10-yr yield will remain in the 2.6-2.8% trading range, perhaps even until the next payrolls early May. For the German 10-yr yield, this trading range is between 1.5-1.7%. In the short term, the downside might be under pressure if the ECB QE debate continues producing soft headlines.