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Yesterday, global core bonds rallied further. Neither positive risk sentiment on European equity markets, nor US eco data could spoil core bonds’ upward momentum. The latter were mixed with focus on a weaker consumer confidence. The final leap higher occurred after a stellar $35B 5-yr Note auction. Month-end extension buying was marginally supportive as well. The US Note future broke above first resistance (127-00+) while the Bund tested the contract high (152.49). The German 10-yr yield is 2 bps away from the all-time low (0.72%). At the end of the day, the German yield curve bull flattens with yields flat bps (2-yr) to 3.9 bps (30-yr) lower. In the US, the curve shifted in the same way with yields up to 5.9 bps lower. Technically, both the US 10-yr yield and US 30-yr yield fell below the lower bound of the past month’s sideways trading ranges (respectively 2.27% & 3%). The US 5-yr yield for now remains above that level (1.55%) but the margin is small. A sustained break would be a technical signal that US yields could drop further short term.

Ahead of Thanksgiving and Black Friday, the US eco calendar is well-filled today. For markets, the durables, PCE deflator and Chicago PMI will probably be most important. Nevertheless, also jobless claims and new home sales might be able to move the markets as the data are often volatile and substantial deviations from the consensus are possible. US durable goods orders have recently been volatile too, mainly due to swings in aircraft orders. In October, durable goods orders are forecast to have dropped by 0.6% M/M which if confirmed would be the third consecutive decline. Transportation orders will probably continue to act as a drag due to a drop in aircraft orders. Excluding transportation however, durables are forecast to have picked up by 0.5% M/M following a 0.1% M/M decline. For the headline reading, we see risks for a lower outcome, but we believe that the underlying picture will probably be robust, supported by recovering demand for investment goods. Personal income and spending should both pick up in October following poor September data. After an upward surprise in the CPI, we believe that also the PCE deflator might surprise on the upside. The Chicago PMI is forecast to edge somewhat lower in November following a significant increase in the previous month. Regional business confidence indicators showed a mixed picture, but we believe that the bar for the Chicago PMI is not too high. Both new and pending home sales are forecast to have increased slightly in October, while initial claims should edge slightly lower. Michigan consumer confidence might be interesting too after the weaker Conference Board’s indicator yesterday and we believe that also Michigan consumer confidence might come out somewhat lower.

The German Finanzagentur taps the on the run 10-yr Bund (€4B 1% Aug2024). It’s the final Bund auction of the year. Total bids averaged €4.89B at the previous 4 Bund auctions, but at the October auction they fell shy of €4B. The Bund cheapened around 1 bp in ASW spread terms going into the auction and trades normal on the German yield curve. Overall, we expect a plain vanilla auction at best especially given the fact that the German 10-yr yield is a tad away from the all-time low. The US Treasury continued its end-of-month refinancing operation with a stellar $35B 5-yr Note and a mediocre $13B 2-yr FRN auction. The auction stopped 2 bps through the 1:00 PM bid side with a strong bid cover (2.91 vs 2.74 average this year). The strong results were driven primarily by the second largest Indirect bid for a 5-yr auction on record, as well as the second largest Indirect takedown. The Direct and Dealer bids were both in line with recent auctions. Today, the US Treasury ends its refinancing operation with a $29B 7-yr Note auction.

Overnight, Asian equities trade higher with a small underperformance of Japan on the back of a stronger yen. There is no big headline news. The US Note future trades with a marginal upward bias.

Today, the eco calendar is jam-packed in the US ahead of Thanksgiving. We believe that risks are in general for upside surprises (see above), but of late stronger US eco data did everything but triggering higher US rates. Ahead of the long weekend (volumes will be low on “Black Friday”), investors might prefer a cautious stance (supportive for bonds). We keep a close eye at the technical breaks in the US 10-yr and 30-yr yields. The German 10-yr yield is set to test the 0.72% record low.

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. Since that meeting, US rates were relatively stable in a thin sideways range. Yesterday’s technical breaks on the downside (in yield terms), despite stronger US eco data the past month, are an important warning signal. Is it because markets doubt the Fed? Or because they fear a that disinflation will transit to the US? Or because investors find the yield pick-up at the long end of the US curve attractive in the current environment? Whatever the reason, a confirmed break below 1.55% (5-yr), 2.27% (10-yr) and 3% (30-yr) would suggest that yield could drop further short term even though it feels completely unnatural given the Fed’s stance and eco data strength. The US Note future broke above 127-00+, opening the path to the contract high?! (130-17).

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.

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