The eco calendar contains US retail sales

Rates

Friday, global core bonds tested (US Note future) and broke (Bund) the recent highs. Sentiment was clearly risk-off as the sell-off on equity markets continued. US eco releases, PPI & Michigan consumer sentiment had little impact. Yield changes remained rather small though, with US yields up to 3 bps lower while German Bunds were up to 2.6 bps lower. Both curves flattened. US and German 10-yr yields are close to or at key yield support at 2.60% and 1.50%. We would like to see the break in the Bund confirmed by the picture of the 10-yr yield. The 30-yr US yield dropped below 3.50%, which if confirmed deteriorates the technical picture. EMU bond spreads widened in this risk averse climate for the second consecutive session. Spanish/Italian spreads add 4 to 6 bps, Portugal 11 bps and Greece 35 bps.

The holiday-shortened week starts with an enticing eco calendar today. US retail sales and EMU industrial production are scheduled for release. Citigroup announces Q1 earnings and ECB’s Noyer and Fed’s Tarullo speak.

EMU industrial production is forecast to have picked up slightly in February, following a marginal drop in January.. More interesting might be the US retail sales figures. Following poor data during the winter months, when the US was plagued by extreme weather conditions, it will be interesting to see whether there is some rebound in March. The consensus is looking for a strong 0.9% M/M rebound, while the control group is forecast to show a more moderate 0.6% M/M increase. The headline figure will probably be supported by a strong rebound in vehicle sales, while the core reading is expected to profit from some pent up demand. We believe however that the bar is quite high and therefore we see risks for a downward surprise.

ECB Draghi and Coeure signalled in the weekend in Washington that they are closing in on a further easing of policy. Of course, the ECB still needs to decide whether more action is needed, but speaking in firmer way and giving details of possible tools means chances they will use it are rising. ECB Nowotny suggested that a decision could be taken in June (when new forecasts are available). “The strengthening of the exchange rate would require, to make our monetary stance equally accommodative, further monetary policy accommodation”, Draghi said adding “The strengthening of the exchange rate requires further monetary stimulus. That is an important dimension for us”.

ECB Coeure spoke in Washington too, more in particular about how an eventual QE programme would look like. According to Coeure, purchases would be linked to the interest rate maturities that are most important for firms’ and households’ investment and consumption decisions. This tends to be the intermediate to longer part of the curve. The ECB asset purchases should take into account the various benchmarks for loans prices in the various national jurisdictions. Finally, to achieve a homogenous reduction of term premiums across relevant markets, segmentation has to be taken into consideration. So the size of the purchases is not so important, but the effect on the premiums in different markets.

This week’s EMU bond supply is thin with only Germany and France tapping the market. On Wednesday, the Germany Finanzagentur auctions the on the run 10-yr Bund (€4B Feb2024). On Thursday, the French debt agency launches a new 2-yr BTAN (0.25% Nov2016) and taps the on the run 5-yr BTAN (1% May2019) for a combined €7-8B. Additionally, they’ll try to raise €1-1.5B via inflation-linked bonds. In Italy, the treasury sells its first retail ‘BTP Italia’ of the year. This week’s auctions won’t be supported by bond redemptions.

Overnight, losses on Asian equity markets are contained given European and US losses on Friday. Japanese equities slightly outperform. This weekend’s events include a deterioration of the Ukraine/Russian conflict and soft comments by ECB Draghi and Coeuré (see above). The US Note future trades slightly higher and the US 10-yr yield tested 2.6% support.

Today, the eco calendar contains US retail sales. We see risks for a below consensus outcome. Adding geopolitical tensions and a soft ECB, these are all supportive elements for core bonds. The only thing that might prevent more bond gains are technical support levels in yield terms. The German 10-yr yield arrived at the lower bound of the 1.5-1.7% trading range, which is also 62% retracement from last year’s May-September up-leg. A break below this level, paves the way for more bond gains/lower yields. In the US, the 10-yr yield tested the lower bound of the 2.6-2.8% range (key support 2.45%), but (technically) more important is the 30-yr yield. It fell below 3.5% key support (38% retracement) and could be the canary in the coalmine if we see the break confirmed. In case of an improvement of risk sentiment on equity markets, a break below these support levels could be more difficult. Anyway, high alertness is warranted today and later this week with these key levels under huge pressure.