The eco calendar heats up with several potential market movers

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Yesterday, stronger than expected business sentiment in EMU (and China) improved global risk appetite, which hit core bonds, helped European, especially peripheral, equities and pushed USD/JPY higher. However, the moves were only modest in scope, suggesting that it is not considered as the start of a new trading trend.
German yields were up to 3 basis points higher, while US ones rose by up to 4.6 basis points. Given the different stance of monetary policy, in Germany, the curve steepened, while in the US, the belly of the curve was hit the most. Peripheral bonds outperformed as 10-year yield spreads narrowed 2-to-5 basis points with the Greek outperforming (spread -15 bps).

Regarding EMU bond markets, we think that investors may have underestimated the message from the PMI business sentiment figures. Indeed, the PMI’s jumped higher in July compared to June and defied expectations for a further small decline. Coming after months of weakening eco data and speculation that the ECB would be obliged to start an asset purchases programme, we would have expected more losses for the Bund. There is also a technical aspect in play. The 10-year Bund yield set on Wednesday a new all-time closing low (a whisker from the all-time low of 1.12%) after a strong 6-month downtrend. So, yesterday’s strong PMI’s might have been considered as a signal that the turning point has been reached. Indeed, should European eco data start to show improvement and if US data would confirm the acceleration of growth, the uptrend in core bonds may have come to an end. Of course, one data point is unable to turn a well embedded trend. However, uncertainty may enter the minds of the bond bulls. In this context, we install a firm sell-on upticks (in prices) call, which may turn into an outright sell advice if eco data are stronger and some technical signals that a bottom is in place show up. It might be that we have to wait until early September (after the summer) to get enough evidence of a change in trend.

Today, the eco calendar remains interesting with the German IFO indicator, euro zone M3 money supply and credit growth and US durable goods orders. In the UK, the Q2 GDP data will be released and the ECB will announce the amount of LTRO repayments.

After yesterday’s stronger than expected PMI’s, especially for Germany, it will be interesting to see whether the IFO confirms this improvement.

The consensus is looking for a limited drop in the IFO business climate indicator, from 109.7 to 109.4. If confirmed, this would be the third consecutive monthly decline. After the strong PMI’s however, we believe that the risks might be for an upward surprise. In the euro area, growth in M3 money supply is forecast to have picked up further following a substantial increase in May. For June, the consensus is looking for an increase from 1.0% Y/Y to 1.2% Y/Y. More interesting might however be the lending data. Last month, lending data were distorted due to a large sale/securitization of mortgage loans in France, which suppressed lending data. For June, it will therefore be interesting to see whether there is any improvement. We believe however that lending will probably remain quite poor In the coming quarters however, it will be interesting to see whether the ECB’s measures are starting to have an impact. Finally in the US, durable goods orders are forecast to have increased by 0.5% M/M in June, following a 0.9% M/M drop in May. Transportation is forecast to be broadly flat, with durables ex transportation rising by 0.5% M/M too. After the strong manufacturing surveys of recent and increasing vehicle and Boeing sales, we see risks for an upward surprise.

Overnight, Asian equity markets show again a mixed picture, with China and Japan slightly outperforming. Japanese inflation was very close to expectations. The US accuses Russia openly of attacking Ukraine targets from within Russia.
This is an important development that might lead to a risk-off bias at the start of trading, even if we see Japanese equities moving higher in recent trading. US Treasuries are slightly higher, which should lead to a similar higher opening for the Bund.

Today, the eco calendar heats up with several potential market movers. We see upside risks for the IFO and durable orders, but our conviction is not very great. In theory, stronger eco data is negative for core bonds. However, the latest geopolitical developments (see above) are pointing to some risk-off sentiment. It remains to be seen whether these tensions mount during the trading session and ahead of the week-end, when there is often a bias in favour of core bonds.
Above, we suggested that investors might have underestimated the signal of the better EMU PMI’s and that it may turn out to have been of greater interest for core bonds; in the sense that it may signal a bottoming out of the 6 month downtrend in yields. However, there is not enough evidence yet to base a long term view on. So, in a first instance, we changed our view to a sell-on up-ticks, preferably near the highs. Indeed, we may still easily return to the highs (yield lows) and even break these.