On Wednesday, German bonds had a boring

Rates

On Wednesday, German bonds had a boring, choppy trading session that was only temporarily disturbed by the weak IFO report. Another gradual rise higher intraday failed, leaving Bunds little changed in the close. US Treasuries started to slide towards the end of the European session. The very strong New Home sales were ignored, but climbing equities and positioning ahead of the 5-year Note auction might have been the culprit, with an additional move down when the 5-yr Note auction turned out to be weak. Losses were moderate, pushing US yields up by about 3 bps across the curve, the 2-yr outperforming with a 2 bps increase.

Today, the eco calendar contains the euro zone M3 money supply and credit growth data, the US durable goods orders, initial jobless claims and the US services PMI. In August, growth in euro zone M3 money supply is forecast to have picked up further to 1.9% Y/Y from 1.8% Y/Y in July, after already an increase in the previous month. More interesting might be the lending data. Will lending to households continue to improve gradually and what about lending to firms? In the US, durable goods orders will continue their volatile pattern due to huge swings in Boeing orders. Durable goods orders are forecast to have dropped by 18% M/M in August, following a 22.6% M/M surge. It might however be more interesting to look at the ex-transportation measure, which is forecast to have increased by 0.6% M/M in August following a 0.7% M/M drop in July. Finally, also US jobless claims have been volatile recently, probably due to the Labour Day Holiday. For the past week, an increase by 16 000 to 296 000 is expected. The risks might be for an upward surprise on seasonal adjustment difficulties.

ECB Draghi speaks in Vilnius. Ahead of the speech, he gave an interview. He repeated that additional unconventional measures could be used if the inflation target was under threat. What might have been new was that he added the ECB may alter the size or composition of unconventional interventions. Is this a reference to the disappointing result of the TLTRO (which he earlier called in line with ECB expectations) and does he want to make up the “miss” by more ABS/covered bond buying? Or is this a hint to full blown QE (sov. debt buying)? We hope to hear more about it in his speech.

Fed Evans (dove) unexpectedly saw dangers from a premature rate hike and said the Fed should be exceptionally patient before raising rates “even to the point of allowing a modest overshooting of our inflation target”. Cleveland Fed Mester a more moderate voice inside the FOMC repeated that the forward guidance (“considerable time”) is up for a reformulation. She wants it to signal how policy will respond to changes in economic conditions. Interesting, but nothing really market-moving.

The US Treasury continued its end-of-month refinancing operation with a disappointing $35B 5-year Note auction. The auction stopped with a tail and the bid cover (2.56) was dead on average so far this year. The Indirect bid was again good, but both the Dealer and Direct bids were very weak. Today, the Treasury concludes its operation with a $29B 7-yr Note auction. Currently, the WI is trading around 2.26%. In Europe, the Italian debt agency sells inflation-linked BTP’s and a zero-coupon CTZ.

Overnight, most Asian equities trade in positive territory extending bullish sentiment from Wall Street. RBNZ governor Wheeler plead for a weaker kiwi dollar (see FX section) and the WSJ reports a possible replacement of the PBOC chief. Overnight, the US Note future trades marginally higher this shouldn’t have a big impact on the Bund opening.

The EMU calendar contains M3 money and lending data. The latter could become even more important than before in coming months as the ECB unrolls her easing programmes. Apart from the data, ECB Draghi delivers a speech in Vilnius. Newspaper comments suggest a dovish chairman who is both ready to alter current programmes and extend them to counter medium-term inflation risks. Any dovish comments on full blown QE are positive elements for the Bund. In the US, durable goods and weekly claims are on the agenda, but we don’t expect them to have lasting influence on trading. A speech by Fed Lockhart is a wildcard for trading.

Last week, the US Treasury market tested intensively yield resistance (5-yr: 1.85%, 10-yr: 2.66/69%), but could not break higher. This suggests that the down-move (prices) might be at least temporarily stopped. In this respect, we changed our ST outlook to neutral from bearish for US Treasuries with a 123-10 to 125 ST trading range. The Bund recaptured the uptrendline, which opens the path for a test of the 149.91 contract high, but recent price action (PMI/IFO weakness unable to trigger rally) was a bit disappointing.