The euro zone unemployment rate is expected to have stabilized at 11.5%

Rates

On Wednesday, there was no follow-through selling on the hawkish FOMC statement. On the contrary, core bonds turned north, but with a clear outperformance of the Bund. Warning comments by EBA Enria on the banking sector triggered a risk-off environment. Lower German inflation data were supportive for the Bund too. US eco data strength couldn’t outweigh these factors. At the end of the session, the German yield curve bull flattened with yields 0.3 bps (2-yr) to 6.1 bps (30-yr) lower. In the US, yield changes varied between - 0.3 bps and -1.2 bps.

Today, the eco calendar contains the advance estimate of euro zone HICP inflation for October, the euro zone unemployment rate, US personal income and spending, the US employment cost index, Chicago PMI and the final reading of U. of Michigan consumer confidence. ECB’s Linde & Visco & Fed’s Williams are scheduled to speak.

In October, euro zone HICP inflation is forecast to have picked up slightly, from 0.3% Y/Y to 0.4% Y/Y, off its 5-year low. Yesterday, German HICP inflation already surprised on the downside of expectations, falling from 0.8% Y/Y to 0.7% Y/Y, while an increase was expected. On a monthly basis, inflation was down by 0.3% M/M. Belgian and Spanish inflation on the contrary, edged up slightly. Nevertheless, we still believe that the risks are for a downward surprise, with a stabilization at 0.3% Y/Y likely, although a further decline is not entirely excluded. The euro zone unemployment rate is expected to have stabilized at 11.5% in September. Although the recovery has slowed recently, we still believe that the risks for the unemployment rate are on the downside, after having stabilized at 11.5% for three months. In the US, personal income and spending data are less interesting after yesterday’s GDP data. The Employment Cost Index will be more interesting, especially after the strong figure in Q2. In the second quarter, the employment cost index rose by 0.7% Q/Q, up from 0.3% Q/Q in Q1, but a slower increase is expected in Q3, by 0.5% Q/Q. We have no reasons to distance ourselves from the consensus, but any surprise will probably be closely watched. The Chicago PMI is expected to show a marginal drop, from 60.5 to 60, but we believe that the risks are for a stronger reading after the mostly better than expected other regional business confidence indicators. The final reading of Michigan consumer confidence is forecast confirm the first estimate, which showed an increase from 84.6 to 86.4, the highest level in 7 years. Also for consumer sentiment, we continue to see upside risks.

In the US, the Treasury concluded its end-of-month refinancing operation with a weak $29B 7-yr Note auction. The auction stopped with a 0.9 bps tail and the bid cover was the smallest in nearly a year (2.42 versus 2.58 average so far this year). Bidding details were in line with the disappointing 2- and 5-yr Note auctions earlier this week: the dealer bid collapsed and only the indirect bid managed to hold up.

Overnight, Asian equity markets were boosted by unexpected monetary easing by the Bank of Japan (see FX section). Specifically, the BoJ will expand its annual asset purchases (JGB’s, stock and property funds) to ¥80 trillion from the previous target range of ¥60-70 trillion. Japanese indices outperform and gain up to 5%. Somewhat strange perhaps, US yields shift around 5 bps higher this morning amid this easing offensive (risk on/risk off). This suggests that the Bund will open significantly lower as well.

Today, the eco calendar is interesting with EMU CPI data. Risks are on the downside of expectations, but a negative surprise seems discounted after yesterday’s lower German outcome. In the US, eco data will be closely scrutinised following the tweaked FOMC forward guidance. We especially pay attention to the Q3 employment cost index. In the context of a declining unemployment rate, it is interesting to see whether we finally get some spill-over in compensation statistics. It would be a sign for the FOMC that slack in labour markets is erased which puts upward pressure on wages/inflation. Thus, any upward surprise in this index is a negative for the US Note future. Additionally, we see upward risks for Chicago PMI and final figure of Michigan confidence.

Technically, the German Bund continued trying to retake the uptrend line on lower German CPI data. The test failed. The Bund remains in a narrow range between 150 and 151. A sustained drop below 149.91 would change the ST technical picture to neutral. For the US Note future, the FOMC verdict opens the way for a new downleg especially when accompanied by stronger US eco data. In that context, we look forward to next week with ISM’s, ADP and payrolls.