The eco calendar contains the German ZEW indicator

Rates

On Monday, global core bonds initially profited from safe haven flows stemming from Asia following a poo Japanese GDP. Throughout the trading session these gains evaporated and bonds ended lower. US eco data were a tad below consensus and ECB talk dovish but it couldn’t stop the modest decline in core bonds. Intra-EMU bond spreads narrowed when Draghi said before European Parliament that “… other unconventional measures might entail the purchase of a variety of assets, one of which is government bonds.” 10-yr spreads versus Germany shed up to 6 bps. At the end of dealings, the German yield curve bear steepened with yields 0.7 bps (2-yr) to 1.9 bps (30-yr) higher. Changes on the US curve vary between -0.4 bps (2-yr) and + 2 bps (5-yr).

Today, the eco calendar contains the German ZEW indicator, US PPI data and NAHB housing market index. US data are second tier and for the expectations component of the German ZEW, a small increase from -0.8 to 3.6 is expected.
ECB’s Lautenschlaeger & Knot and Minneapolis Fed Kocherlakota are scheduled to speak. Knot discusses deflation risk in parliament (after European trading), which could bring interesting headlines. Kocherlakota is the dovish Fed governor who dissented at the latest FOMC meeting. He stands more or less alone is his views which are known (fear of too low inflation) and are unlikely to impact the market. The ECB holds its weekly MRO tender. Last week, 151 banks asked for €98.4B of liquidity. Tonight we’ll report on the outcome and implications for eonia and excess liquidity (currently €106B). Eonia still fixes negative (-2.7 bps).

Overnight, most Asian equities trade positive. One day after the disappointing Japanese GDP data, Japanese equities already outperform as PM seems set to call snap elections and delay the sales tax hike to renew his reform mandate. Chinese equities underperforms as home prices fell for a second straight month in October. The US Note future trades stable overnight, suggesting a neutral opening for the Bund.

Today, the EMU calendar is thin with only German ZEW. US eco data are second tier with PPI data and NAHB housing index. Lower PPI data might get some attention as the Fed downplayed the risk of too low inflation.
Tomorrow’s FOMC Minutes will give us more hindsight on the debate.
Central bank speakers aren’t expected to stir markets either (see above). That leaves sentiment on risk and technical factors as main market forces today. Some anticipation on (hawkish?) FOMC Minutes could be a minor negative, but overall we don’t expect much from today’s trading.

The FOMC changed its forward guidance to include the data-dependence of the lift-off date. We argued that US Treasuries would become more sensitive to US eco data. The past two weeks, decent to stronger data failed to trigger substantially higher rates. We are disappointed but our main view remains that the FOMC verdict opened the way for a new downleg of US Treasuries, especially if accompanied by stronger data. Any spill-over from higher rates to Europe will be very limited, with the ECB clearly studying the option to ease policy further. The downside in the Bund seems well protected (149.91 first support). Sideways trading between that support and the contract high (152-49) is likely. We approach a test of the upside.