The eco calendar is enticing both in the US and in EMU

Rates

On Friday, global core bonds traded with an upward bias. Positioning into the weekend seems to be the main driver. The deteriorating situation in eastern Ukraine created a safe haven bid. Bunds outperformed US Treasuries and the Bund future even approached the contract high, while the 10‐yr yield dropped again below 1.50%. US Treasuries eventually returned from the intraday highs. German yields fell between 1.5 and 5.6 bps, the curve flattening, whereas US yield declines were limited to 1.8 bps (10‐yr). On intra‐EMU bond markets, peripheral spreads widened modestly.

The eco calendar is thin today, both in the US and Europe with only the US pending home sales and the German import prices scheduled for release. Later this week, markets will have to digest a lot of new information. The FOMC meets tomorrow and concludes its two‐day meeting with a statement on Wednesday. There will be another $10B taper, lowering the pace of monthly purchases to $45B. Economic data have been sufficiently strong to continue QE tapering according to plan. We don’t expect the FOMC to make other changes to its policy stance. The FOMC will probably debate on how to conduct policy further out. The low inflation will be one source of uncertainty that will get attention, as will the size of slack in the economy. Besides these, there are the preparations ahead of the first rate hike. How will the Fed absorb the excess liquidity, which is needed to make sure that rate increases are translated in higher market rates? Of course, there is no urgency in coming to decisions on these points, but they need to be prepared. There are no new economic projections and no post‐meeting press conference , which suggests that no big news is expected from this week’s meeting. We probably will have to wait for the Minutes, to be released in two weeks’ time, to get a take on the direction of the discussions. However, ahead of the FOMC statement, market participants may stay cautious.

The eco calendar is enticing both in the US and in EMU. In the US, attention will be on the labour market data with the ADP release on Wednesday and the key payrolls on Friday. Consensus is looking for an increase of payrolls by 215 000 (April) and a drop in the unemployment rate to 6.6%. Also of importance are the Q1 GDP on Wednesday (modest 1.2% growth is expected due to bad weather) and the ISM on Thursday (54.3 in April from 53.7). We expect strong data at the start of Q2. In EMU, attention goes to the inflation data for April. Germany reports on Tuesday, EMU on Wednesday. A rebound is expected due to Easter calendar effects, but how big will it be? Consensus is for 0.8% Y/Y for the headline and 1% Y/Y for the core, up from respectively 0.5% Y/Y and 0.7% Y/Y previously. A shortfall raises chances for a rate cut at the May 8 ECB meeting.

This week’s scheduled EMU bond supply is thin with only Italian (tomorrow) and French (Wednesday) auctions. The Italian treasury creates a new 5‐yr CCTeu (floating rate note) and taps the on the run 5‐yr & 10‐yr BTP (2.50% May2019 & 3.75% Sep2024). The French debt agency taps the on the run 10‐yr OAT (2.25% May2024) and launches a new 15‐yr OAT (2.15% May2030) for a combined €7‐8B. The auctions will be supported by a €15.44B 3‐yr redemption.

On Friday, Fitch upgraded the Spanish BBB rating by one notch to BBB+ (stable outlook). That’s the highest rating at the big three rating agencies. Fitch cites an improvement in the outlook of the country’s finances and economy. Earlier this year, Moody’s also raised the Spanish outlook, from Baa3 to Baa2. At S&P, Spain is still rated BBB‐.On secondary bond markets, this is positive for Spain though we don’t expect much outperformance today.

Overnight, most Asian equity indices trades negative copying Friday’s WS weakness. Deteriorating tensions in eastern Ukraine amid G7 warnings of a new round of sanctions weigh on sentiment as well. Members of Germanled military observer team are being held hostage in the separatist stronghold Slavyansk and the separatists announced a May 11 referendum. The US Note future trades nevertheless a few ticks lower.

Today, the eco calendar is extremely thin. The corporate earnings calendar is also less enticing. Ahead of this week’s key eco releases, investors might stay side‐lined. On Wednesday, we get US ADP, Q1 GDP and the FOMC decisions. On Thursday, there is the manufacturing ISM and on Friday, the payrolls report. In the euro zone, inflation data are key (Germany on Tuesday; EMU on Wednesday). The outcome of these data will determine whether or not the German 10‐yr yield breaks firmly below 1.50% (Friday’s close 1.48%). Strong numbers and higher inflation will be necessary to prevent lower yields. Risk‐off sentiment on equity markets is possible as a force for bond markets. In that respect, we closely look whether the situation in Ukraine escalates further (bond positive). In the US, the 10‐yr yield remains well above 2.6% support (2.68%) but the 30‐yr yield is sliding further away from 3.50% support (3.45%). A canary in the coalmine?