The eco calendar contains the first estimate of German inflation

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More hawkish signs from within Fed today?

Global core bonds parted ways. For EMU bonds and the Bund, the sky was the limit in the run-up to the ECB purchases. US Treasuries underperformed. US January core CPI showed a small upward surprise. Small, but enough to put US Treasuries under pressure until the end of dealings. Fed governors Bullard, Williams and Mester repeated their hawkish views, skewed to raising rates in June. The $29B 7-yr Note auction was weak. At the end of the session, the US yield curve shifted 4.3 bps (2-yr) to 7.1 bps (7-yr) higher. The German yield curve bull flattened with yields 0.3 bps (2-yr) to 4.8 bps (30-yr) lower.

On intra-EMU bond markets, 10-yr yield spreads versus Germany narrowed up to 12 bps (Portugal) with Greece underperforming (+41 bps). Local media reported that the Euro Working Group discussed Greece’s imminent funding problems yesterday. Greece is due to pay the IMF €1.4B next month but a Greek Minister of State suggested that Athens might ask a two-month delay. That’s something the IMF will most likely reject.

Today, the eco calendar contains the first estimate of German, Spanish and Italian HICP inflation for February, the second estimate of US Q4 GDP, the Chicago PMI and final reading of University of Michigan consumer confidence for February. Fed’s Mester, Dudley, Fischer and ECB’s Constancio are scheduled to speak.

After having dropped sharply over the previous two months, from 0.5% Y/Y in November to -0.5% Y/Y in January, German inflation is forecast to stabilize in February. On a monthly basis, German HICP is forecast to have increased by 0.6% M/M, but the annual reading is expected unchanged (at -0.5% Y/Y) due to negative base effects. Ahead of the national figure, the regional data should already give an indication. For now, we see risks for an upward surprise.
Yesterday, also Belgian inflation picked up slightly. In Spain, inflation is expected stable at -1.5% Y/Y, while Italian inflation is forecast to have increased from -0.5% Y/Y to -0.3% Y/Y. In the US, a downward revision is expected to the Q4 GDP data, from 2.6% Q/Q annualized to 2.0% Q/Q annualized. The main reason for the downward revision will be a further downward adjustment to net exports, while also the contribution from inventories will be smaller. A limited upward revision to personal consumption and non-residential investments might partly offset the downward revisions.

As a result, we believe that the risks are for a slightly higher outcome. The Chicago PMI is expected to have dropped, from 59.4 to 58.0, following a marginal increase in January. After poor regional data earlier in the month, we see risks for a downward surprise. The final figure of U. of Michigan consumer confidence for February is forecast to show a marginal upward revision from 93.6 to 94.0, after a very poor first estimate. We have no reasons to distance ourselves from the consensus.

The US Treasury concluded its end-of-month refinancing operation with a weak $29B 7-yr Note auction. Earlier this week, the 2-yr, 5-yr and 2-yr floating rate Note auctions went well. Yesterday’s auction stopped with a moderate tail and a light bid cover (2.37 vs. 2.54 average over the past year). Bidding details showed that only the indirect bid remained healthy.

Overnight, Asian stocks trade mixed to marginally positive with China slightly outperforming. Several Japanese eco data were released (see currencies) and overall they were a weak but they don’t leave traces. The US Note future is marginally higher but we don’t expect it to translate in a higher Bund opening.

Today’s eco calendar is well-filled with German CPI data, US GDP (revision), Chicago PMI and final Michigan sentiment. In EMU, we see risks on the upside of expectation for German CPI data. Given this week’s rally of the Bund, that could trigger some profit taking going into the weekend.
However, with the start of ECB QE purchases looming and Greece’s possible funding problems coming to the fore (see above), we don’t take that for granted. The technical picture remains bullish. Upcoming ECB purchases should also limit any upward potential in EMU bond yields.

In the US, eco data risk to be balanced and overshadowed by Fed speak.
Recently, especially the hawkish governors appeared in the media (Bullard, Lockhart, Williams, Lacker, Mester, Fisher, Plosser). Today, two centrist heavy-weights speak: NY Fed Dudley and vice-president Fischer. We expect them to keep close to Yellen’s view in this week’s testimony. A shift from one of them towards the hawkish side would be of high importance.
Technically, yesterday’s US CPI release averted a break above 128-04+ resistance (JUNE contract; previous neckline double top). Ahead of next week’s payrolls, we expect range trading between 126-12 and 128-04+.
Longer term, we hold our June rate hike call and think there is more downside in the Note future as markets are positioned more dovish.