The US eco calendar heats up today

Rates

Yesterday’s trading session is one to rapidly forget. Traded volumes were low and the eco calendar thin. Both the Bund and the US Note future ended nearly unchanged. Weakness in Europe, ahead of and after a better German Ifo, was recovered during US trading. The US Note future eventually even outperformed following a stellar $28B 2-yr Note auction (see below). At the end of the session, the German yield curve showed a small bear steepening with yield changes ranging between +0.2 bps (2-yr) and +1.4 bps (30-yr). In the US, yield changes varied between -0.8 bps (2-yr) and + 0.2 bps (30-yr). On intra-EMU bond markets, 10-yr yield spreads versus Germany narrowed by 1 to 5 bps. The Spanish 10-yr yield fell below 2% for the first time ever.

The US eco calendar heats up today with the second estimate of Q3 GDP, Conference Board’s consumer confidence, the Richmond Fed index and S&P & FHFA house prices. The OECD will publish its economic outlook and Holland (DSL), the ESM (Bonds) and the US (5Yr Notes) will tap the market.

The second estimate of US third quarter GDP is forecast to show a limited downward revision from 3.5% Q/Q annualized to 3.3% Q/Q annualized. A significant downward revision in net exports will probably be offset by an upward adjustment in inventories, while other revisions should be quite limited. We have no reasons to expect a material deviation from the consensus and therefore market impact will probably be limited. More interesting will be Conference Board’s consumer confidence. The indicator reached already a new post-crisis high in October, but a further improvement is forecast for November. The consensus is looking for an increase from 94.5 to 96.0. Although the index is already at a new cyclical high, we continue to see upside risks as also other confidence indicators continued to surprise on the upside recently, probably supported by lower oil prices and a continued improvement in labour market conditions. The Richmond Fed index is expected to weaken slightly in November after reaching a near 4-year high in October. Earlier released business confidence indicators showed a mixed picture with the NY Empire State index slightly weaker, while the Philly fed index was remarkably strong. The consensus is looking for a drop from 20 to 15, but also here we see upside risks. Regarding house prices, S&P CS house prices are forecast to have picked up by 0.25% M/M following declines in the previous four months.

The ECB won’t make a hasty decision to add more stimulus and will hinge any measures on incoming economic data, board member Coeure said. His comments are in line with those of VP Constancio and governor Nowotny. Recent dovish comments by Draghi, raised market bets that the ECB could already ease further in December. We believe that’s wishful thinking and that the ECB will wait at least 2 meetings before adding to its stimulus programmes.

The US Treasury started its end-of-month refinancing operation with a stellar $28B 2-yr Note auction. The auction stopped far through the 1:00 PM bid side with a tremendous bid cover (3.71 vs 3.38 average this year). Demand was up across all categories with especially a big increase in the indirect bid. Today, the Treasury continues with a $13B 2-yr FRN and a $35B 5-yr Note auction. In EMU, the Dutch debt agency taps the on the run 10-yr DSL (€1.5-2.5B 2% Jul2024). It’s the final Dutch auction of the year and the amount on offer is relatively low. The bond didn’t really cheapen going into the auction and trades normal on the Dutch curve. All in all, we expect a plain vanilla auction.

Overnight, Asian equity trade mixed. Japan (catching up after yesterday’s close) and China (in the wake of Friday’s easing) outperform. The US Note future trades stable suggesting a neutral opening for the Bund.

Today, the eco calendar heats up especially in the US. Consumer confidence is the main release. We see risks mainly pointed to the upside of expectations which is a negative for the US Note future. However, of late bonds have been very resilient to stronger eco data. In EMU, the calendar contains the OECD outlook. This should once again paint a grim picture for the (EMU) outlook (positive Bund), but by now these negative headlines should be discounted. End of month buying is a technical positive factor for bonds in this (US) holiday-shortened Thanksgiving week. All in all, these “conflicting” signals point to more range-bound trading today.

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. We are disappointed in the market reaction until now but our main view remains that the FOMC verdict opened the way for a new downleg of US Treasuries (125-27 1st support), 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 support). Sideways trading between that support and the contract high (152.49) is likely. The US Note future is ST locked between 125-27 and 127-00+.