ECB meeting eye-catcher of today's trading

Global core bond trading was dullish so far this week and that was no different yesterday. The only noticeable move occurred in the US session when Treasuries rose ahead of the Non-manufacturing ISM, but lost all (small gains) after the publication. The Beige Book had little impact, even as US Treasuries moved a bit higher. The focus remains on today’s ECB meeting and tomorrow’s payrolls though. In a daily perspective, US yield changes were limited between -2.4 bps (2-yr) and +0.6 bps (30-yr), steepening the curve. Changes on the German yield curve varied between -0.5 bps (30-yr) and +2.3 bps. The German underperformance was a catch-up move with developments in the US on Tuesday evening.

Today, the eco calendar is thin with only US jobless claims and factory orders. The ECB and Bank of England decide on rates and Spain (Bono & Obligaction), France (OAT) and Sweden (Bonds) tap the market. US initial jobless claims rose significantly in the week ending the 21 of February, as President’s Day holiday distorted the data. For this week, consensus is looking for a decline to 295 000, reversing only part of the previous week’s uptick. Poor weather conditions might still have had an influence and therefore another upward surprise is not excluded. US factory orders are expected to show a limited rebound, by 0.2% M/M in January. Durable orders were significantly stronger, but the petroleum sector will weigh on orders for non-durables.

The Beige Book was slightly less upbeat than the previous one, likely due for transitory reasons. Overall conditions remain consistent with “modest” or “moderate” activity across the 12 districts. Six districts said growth was moderate and two that it was modest. Kansas reported slight growth and Richmond slower growth. Boston said firms were upbeat. Atlanta finally downgraded conditions. The slight weakening was sometimes due to harsh winter conditions in the Northeast and Midwest, sometimes due to slowing in the energy-related industries in some districts and sometimes due to the labour disputes in major West coast posts. On wages and prices, wage pressures remained moderate and were limited largely to workers in skilled occupations. Most District contacts cited only flat to slightly increasing prices. So, overall, the Beige Book as such might be an argument to remain patient. However in the longer term context, the FOMC may choose for more freedom to act when circumstances change and thus nevertheless vote to drop the “patient” phrase from the statement later this month.

France and Spain tap the market. The French debt agency taps two off the run OAT’s (4.25% Oct2023 & 5.5% Apr2029) and the on the run 10-yr OAT (0.5% May2025) for €7.5-8.5B. The bonds on offer didn’t cheapen in ASW-spread terms going into the auctions and the OAT’s trade normal on the French curve. We expect a plain vanilla auction. The Spanish treasury taps the on the run 3-yr Bono (0.5% Oct2017), the on the run 5-yr Bono (1.4% Jan2020) and the off the run 30-yr Obligacion (5.75% Jul2032) for up to €5B. Spanish bonds continue performing well on the secondary market with ECB purchases in hindsight. We think that overruling factor will continue supporting auctions.

Overnight, Asian stocks trade mixed with China underperforming after Chinese PM Li Keqiang lowered the country’s GDP growth target to “around 7%”. The US Note future trades stable ignoring a slightly softer Fed beige book (see above). Kansas City Fed George defended her mid-2015 rate hike call, balancing earlier dovish comments from Chicago Fed Evans (1st hike in 2016). Overall we expect a neutral opening for the Bund (contract change from March to June).

Today’s eco calendar focuses on the ECB meeting. Draghi is expected to deliver operational details on the QE-programme after which purchases can start. That should cap upward potential of EMU bond yields. The Bund trades in the 155.80-157.27/157.77 sideways range and we have no reason to expect a break. New growth and inflation forecasts will be interesting as well (first time 2017). For a full preview, click here. Overall, the ECB-meeting risks being a non-event for markets.

US eco data are second tier and irrelevant ahead of the US payrolls. SF Fed Williams speaks on economic policy. Last month, he was rather hawkish indicating that around midyear was a good guess for when a 1st rate hike is appropriate. He also didn’t eliminate a June rate hike. Similar hawkish comments could still push the US Note future further to the lower bound of the current 126-12 to 128-04+ trading range. Longer term, we hold our June rate hike call (even as the Beige Book has slightly lowered chances for that to happen in March) and think there is more downside in the Note future as markets are positioned more dovish.