US markets are closed today in observance of Labour Day

Rates

On Friday, global core bonds had an uninspiring session, possibly due to the upcoming long weekend in the US. In the European morning session there was some modest profit taking on the breath-taking Bund rally of late, as European eco data were near expectations but some parties were still looking for a below consensus EMU inflation report. In the US session, US Treasuries held a sideways trading range, as strong eco data, Chicago PMI and Michigan consumer sentiment were at the time of publication offset by geopolitical tensions (UK terror alert raised to severe). So US Treasuries and the Bunds ended the session near Thursday’s close. The curves slightly steepened, as some modest profit taking on the earlier flattening trend occurred. However, yields of both curves were only modestly impacted (between -1/-1.4 to 0.7/1.5 bps) in a daily perspective. On intra-EMU bond markets, Spain, Italy and Ireland marginally outperform (10-yr spreads -1 to -2 bps), while Greece and Portugal underperformed (+5/6 bps).

US markets are closed today in observance of Labour Day. In the euro area, the final reading of the manufacturing PMI for August will be released. There are no important events scheduled.

According to the first estimate, the euro zone manufacturing PMI weakened further in August, from 51.8 to 50.8, the lowest level in more than one year. The final reading is forecast to confirm this outcome. A substantial upward revision is unlikely as other confidence indicators confirmed the weakening in business sentiment.

Later this week, the calendars become very interesting. In EMU, the ECB meeting (Thursday) takes centre stage after Mr. Draghi suggested recently that the ECB needed to do more to prop up a slowing economy and fight declining inflation. There is however big uncertainty about the timing of an extra policy easing. While Mr. Draghi will definitely sound very dovish, there is scope for some disappointment regarding “hard” decisions. We will publish our views in a flash report tomorrow. In the US, attention turns to the fresh eco releases for August, most notably the ISM (tomorrow) and the payrolls (Friday). We expect solid reports and it will be interesting whether these will be enough to inject some caution in the US Treasuries market following a sharp flattening of the curve in past weeks. It is the last batch of eco data before the Fed meets on September 16-17. In this respect also the beige book (Wednesday) and various Fed speeches will get a lot of attention.

This week’s scheduled EMU bond supply comes from Germany, France and Spain. The German Finanzagentur kicks off on Wednesday with the launch of a new 5-yr Bobl (€5B Oct2019). On Thursday, the French treasury taps the on the run 10-yr OAT (1.75% Nov2024), 15-yr OAT (2.50% May2030) and 30-yr OAT (3.25% May2045) for a combined €8-9B. The Spanish debt agency sells the on the run 10-yr Obligacion (2.75% Oct2024) and 30-yr Obligacion (5.15% Oct2044). This week’s auction won’t be supported by bond redemptions.

Overnight, Asian equity markets trade with modest gains shrugging off marginally weaker Chinese PMI’s and the tensed situation in eastern Ukraine. Russian PM Putin called for ‘statehood’ talks, while the West threatened with further sanctions against Russia. The US Note future trades with small losses, suggesting no particular risk off sentiment.

Today, the EMU calendar is thin with only the final reading of the manufacturing PMI. The release is only second-tier to markets. Moreover, no big revisions are expected. The US calendar is empty with US markets closed for Labour Day. Both factors suggest we might be up for a slow start to the trading week, especially if we include a third element: this week’s backloaded calendar. The centre of gravity comes Thursday (ECB meeting) and Friday (US Payrolls). In the run-up to the ECB meeting, the Bund rallied significantly on dovish easing expectations (deflation risk). We believe the market has become stretched in one direction and think some more neutral repositioning is possible ahead of Thursday. The US Note future closely followed the up-leg in the Bund, despite the stronger economic recovery and different mindset of the central bank (Fed). Therefore we think that also here some repositioning could occur as we expect solid reports in the run-up to payrolls (manufacturing ISM on Tuesday; ADP and non-manufacturing ISM on Thursday). Geopolitical tensions are a wildcard for this strategy.