Today, the eco calendar is thin with only German IFO

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On Friday, a dovish ECB president flavoured a trading day that was meant to be dull with an empty eco calendar. Draghi emphasized the risk that low inflation starts percolating through the economy (economic situation and inflation outlook) and stressed his willingness to do more of needed. “We would step up the pressure and broaden even more the channels through which we intervene, by altering accordingly the size, pace and composition of our purchases”. The Bund moved higher, while 10-yr yield spreads versus Germany narrowed modestly. The move on bond markets was relatively small compared with the losses for the euro and the gains for stocks. The latter surged more than 2% in Europe (also boosted by a Chinese rate cut) and limited the upside potential of core bonds. At the end of the day, the German yield curve shifted 1.9 bps (2-yr) to 2.9 bps (10-yr) lower. In the US, the yield curve bull flattened with yields 0.8 bps (2-yr) to 3.6 bps lower (30-yr). On intra-EMU bond markets, 10-yr yield spreads versus Germany narrowed by 6 bps for Spain & Italy. Greece (-30 bps) and Portugal (-10 bps) outperformed.

ECB Vice-President Constancio said this weekend that the ECB will assess its stimulus programmes in the first quarter of next year. “And in Q1 2015, we have to assess if indeed the programs are contributing to a pace of increase of our balance sheet that is compatible with the sort of expectation that we have for those programs. And if not, then we have to consider other options.” Recent dovish comments by other ECB members, including Draghi, raised market bets that the ECB could already ease further in December (next week). We believe that’s wishful thinking and Constancio’s comments confirm our believe that the ECB will wait at least two meetings before adding to its stimulus programmes.

Today, the eco calendar is thin with only the German IFO business climate indicator and some second-tier data in the US. ECB’s Nowotny, Coeure and Weidmann are scheduled to speak and the ECB will announce the amount of covered bond purchases. On the supply front, the US will tap the market.

In November, the German IFO business climate indicator is forecast to have dropped for a seventh consecutive month. The consensus is looking for a limited decline from 103.2 to 103.0 due to a further weakening in the current assessment index, while the expectations sub-index is forecast to have picked up marginally (from 98.3 to 98.5). After last week’s poor PMI’s, with weakness especially based in Germany, we continue to see risks for a downward surprise.

Also the breakdown will be interesting. A pick-up in the expectations index would be a welcome sign, although we are somewhat more cautious.

The US Treasury starts its end-of-month refinancing operation early this week because of the shortened trading week (Thanksgiving). Today, they start with a $28B 2-yr Note auction. Currently, the WI is trading around 0.54%. Tomorrow, the Treasury continues with a $13B 2-yr FRN auction and a $35B 5-yr Note auction. On Wednesday, they end with a $29B 7-yr Note auction.

In EMU, scheduled supply comes from the Netherlands, Germany and Italy.
The Dutch debt agency kicks off tomorrow by tapping the on the run 10-yr DSL (2% Jul2024). On Wednesday, the Germany Finanzagentur auctions the on the run 10-yr Bund (€4B 1% Aug2024). On Thursday, Italy concludes with probably taps of the on the run 5-yr (1.5% Aug2019) and 10-yr (2.5% Dec2024) BTP’s.

Overnight, Asian equity markets benefit from the Chinese rate cut on Friday (after Asian trading) with China outperforming. Japan is closed for Culture Day. The US Note future trades stable, suggesting a neutral opening for the Bund.

Today, the eco calendar is thin with only German IFO. We see risks on the downside of expectations, which could bring the Bund closer to the contract high (152.49). The German 10-yr yield slides to the record low as well (0.72%). ECB speakers are wildcards but unlikely to move markets after Draghi’s dovish rhetoric last Friday. US supply is a minor negative for Treasuries. In EMU, the calendar is back-loaded with inflation data on Thursday and Friday. In the US, the calendar is packed tomorrow and on Wednesday with US markets closed on Thursday (Thanksgiving) and trading thin on Friday (early close, Black Friday). This special week could thus see “early” end-of-month buying.

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+.