Rates

Yesterday, global core bond trading was uneventful in the run-up to the FOMC decisions. The Fed decided to end its QE-3 programme (final $15B taper) but also tweaked its forward guidance. The “considerable time period” remains, but the Fed added that the lift-off will be data-dependant. On top, the FOMC was less concerned about the risk of too low inflation and sounded more upbeat on the economy (For a full review, see our Flash report).

Overall, there was a clear hawkish shift compared with the previous meeting. At the end of the session, the US yield curve bear flattened with yields 8.7 bps (2-yr; including benchmark change), 6.9 bps (5-yr) and 2.1 bps (10-yr) higher. The 30-yr yield shed 1.8 bps. The Fed Funds strip curve bear steepened (see graph) with a first rate hike now discounted in December 2015 (Feb 2016 ahead of the meeting).

Today, the eco calendar is interesting, both in the US and EMU with the first estimate of US Q3 GDP, US jobless claims, the preliminary estimate of German HICP inflation for October and EC confidence indicators. Fed Chairwoman Yellen is scheduled to speak as are ECB’s Linde and Liikanen. On the supply front, Italy and the US tap the market.

In Q3, US economic growth is forecast to have slowed after expanding at its strongest pace in 2.5 years in Q2. The consensus is looking for a growth figure of 3.0% Q/Q annualized, down from 4.6% Q/Q in Q2. Personal consumption, net exports and non-residential investments probably contributed to growth, while inventories and residential investments are forecast to come out broadly flat.
We stick with the consensus view. In the euro zone, German inflation is forecast to have increased slightly in October, from 0.8% Y/Y to 0.9% Y/Y, despite the sharp drop in the oil price. The uptick is mainly due to negative base effects as HICP inflation is expected to have dropped by 0.1% from the previous month.
Ahead of the national reading, the regional data will already give an indication. We believe that the risks, if there are any, might be for a downward surprise.
Also in the euro zone, European Commission’s economic confidence will be interesting after the mixed confidence indicators earlier this month. Economic confidence is forecast to drop marginally from 99.9 to 99.7. We believe however that the risks are for a stronger outcome following an uptick in consumer confidence and also the PMI’s and Italian business confidence surprised on the upside. Finally, US initial jobless claims are projected stay close to their recent trend (285 000 from 283 000).

The Italian treasury taps the on the run 5-yr BTP (€2-2.5B 1.50% Aug2019) and 10-yr BTP (€2-2.75B 2.50% Dec2024). The past fortnight, both bonds cheapened significantly in ASW-spread terms. On the Italian curve, the 5-yr BTP trades normal whereas the 10-yr BTP is rich. Overall, we believe the auctions will be plain vanilla in the wake of the ECB’s AQR results which gave a negative connotation for Italian banks. Additionally, the Italian treasury taps the on the run 5-yr floating rate CCTeu (€1.5-2B Euribor +0.8% Dec2020) today.

In the US, the treasury continued its end-of-month refinancing operation with a weak $15B 2-yr FRN auction and a sloppy $35B 5-yr Note auction. Demand was scarce ahead of the FOMC decision. The 5-yr auction had a large tail and the bid cover was the smallest in years (2.36 versus 2.78 average this year). Also bidding details were mixed. The indirect bid held up reasonably well, but the dealer bid collapsed. Today, the Treasury ends with a $29B 7-yr auction. The 7-yr WI currently trades around 2.015%.

Overnight, Asian equity markets trade mixed to positive. Like WS yesterday evening, they hold strong despite the hawkish FOMC statement. The US Note future trades flat (no additional losses for now), suggesting a neutral opening for the Bund.

Today, markets will further digest the FOMC decision. The hawkish shift is a negative for (especially shorter-term) US Treasuries. The Fed made a lift-off date officially data-dependant which means markets will be more sensible to US eco data. Today we get US GDP and weekly claims, but next week will be more interesting/key with ISM’s, ADP and payrolls. A speech by Fed chairwoman Yellen is a wildcard. In EMU, German inflation data and EC confidence indicators could also trigger some volatility.

Technically, the German Bund remains below the uptrend line since June. This is a first indication that the bull run slows. A sustained drop below 149.91 would change the ST technical picture to neutral. For the US Note future, the FOMC verdict opens the way for a new downleg especially when accompanied by stronger US eco data.

This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

Recommended Content


Recommended Content

Editors’ Picks

AUD/USD recovers above 0.6750 after Australian jobs data

AUD/USD recovers above 0.6750 after Australian jobs data

AUD/USD picks up a late bid and recovers above 0.6750 in Asian trading on Thursday, following the release of mixed Australian employment data. The extended post-Fed US Dollar recovery, amid a cautious market mood, could limit the pair's upside ahead of US data. 

AUD/USD News
USD.JPY jumps toward 144.00 on the road to recovery

USD.JPY jumps toward 144.00 on the road to recovery

USD/JPY gains traction and approaches 144.00 in Thursday's Asian session. The uptick of the pair is bolstered by the impressive US Dollar recovery. Investors shift their attention to the US data and the Bank of Japan interest rate decision on Friday. 

USD/JPY News
Gold price remains on the defensive amid the post-FOMC USD recovery from YTD low

Gold price remains on the defensive amid the post-FOMC USD recovery from YTD low

Gold price struggles to lure buyers despite the Fed’s jumbo interest rate cut on Wednesday. A further recovery in the US bond yields underpins the USD and caps the non-yielding metal. Concerns about an economic slowdown, along with geopolitical risks, help limit the downside.

Gold News
Ethereum attempts recovery following first rate cut in four years

Ethereum attempts recovery following first rate cut in four years

Ethereum is trading above $2,330 on Wednesday as the market is recovering following the Federal Reserve's decision to cut interest rates by 50 basis points. Meanwhile, Ethereum exchange-traded funds recorded $15.1 million in outflows.

Read more
Australian Unemployment Rate expected to hold steady at 4.2% in August

Australian Unemployment Rate expected to hold steady at 4.2% in August

The Australian Bureau of Statistics will release the monthly employment report at 1:30 GMT on Thursday. The country is expected to have added 25K new positions in August, while the Unemployment Rate is foreseen to remain steady at 4.2%.

Read more
Moneta Markets review 2024: All you need to know

Moneta Markets review 2024: All you need to know

VERIFIED In this review, the FXStreet team provides an independent and thorough analysis based on direct testing and real experiences with Moneta Markets – an excellent broker for novice to intermediate forex traders who want to broaden their knowledge base.

Read More

Majors

Cryptocurrencies

Signatures