Eco calendar heats up: PMI's main focus

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Sharp sell-off in Bund and US Treasuries poses questions

Global core bonds initially enjoyed a relatively quiet session. The Bund traded with a small upward bias until the release of the BoE Minutes (see currencies) which triggered a sell-off in the UK Gilt market and capped the upside for the Bund and US Note future. The ECB increased the ELA ceiling for Greek lenders by €1.5B to €75.5B, helping Greek bonds and the sentiment on risk. For now, the ECB doesn’t change the haircut on Greek collateral used in the ELA operation. ECB Coeure warned that it could change if Greece for example defaults on an IMF repayment.

Just like yesterday, global core bonds came under downward pressure as the US trading session got going. The Bund sold off for the first time in a long while. There was no direct trigger. Overbought conditions were part of the story, but don’t explain the timing. The German government upwardly revised its 2015 GDP forecast (1.5% to 1.8%) based on strong consumption (2%) and investment. This confirms the recently improved eco outlook. The ELA affaire might have played some role as well as does the BoE’s warning that market rate expectations are exceptionally dovish. Weaker EMU consumer confidence was bluntly ignored. At the time of the sell-off, equities did very little. We suspect some big investors may have decided that it was time to take profit.

In a daily perspective, the German and US yield curves bear steepened with yields 0.8 bps (2-yr) to 8.1 bps (30-yr) higher. Changes between US and Germany were rather small. On intra-EMU bond markets, 10-yr yield spreads versus Germany narrowed 12 to 15 bps for Spain, Italy and Portugal with a Greek outperformance (-86 bps).

Eco calendar heats up: PMI’s main focus

In April, the euro zone composite PMI is forecast to increase for a fifth consecutive month with the consensus looking for a rise from 54.0 to 54.4. Both the manufacturing (52.6 from 52.2) and services PMI (54.5 from 54.2) are expected to extend their rebound. Ahead of the euro zone PMI’s, we will already receive data from Germany and France, which should give an indication. For the services sector, we continue to see risks for an upward surprise, due to strong domestic demand. For the manufacturing sector however, we are more cautious as the fragile global recovery is weighing on demand from abroad (weakness in Chinese and Japanese PMI’s overnight). In the US, new home sales are expected to have dropped by 4.5% M/M to 515 000 in March following three consecutive monthly gains. New home sales were unaffected by poor weather conditions over the previous months. The risks are for a stronger correction. Finally, US initial jobless claims are expected to reverse most of the previous week’s uptick. The consensus is looking for a decline from 294 000 to 287 000. Last week’s data were probably distorted by the Easter holidays.

Today’s Strategy

Overnight, most Asian equity markets trade positive in line with the US. Data were mixed with the lowest Chinese HSBC manufacturing PMI in a year (49.2), but strong South-Korean Q1 GDP data. The US Note future trades stable near yesterday’s lows. Today’s EMU eco calendar heats up with EMU PMI’s. Risks are on the upside of expectations for the services, while the outcome for the manufacturing gauge is uncertain. Better data can prolong the correction of the past two days. The Bund shrugged off overbought conditions in a profit-taking move. The correction hit first support at 159.13, but the uptrend is still firmly in place. Even a break below 159.13, which we deem likely, won’t change that. Only a break below the trendline (now at 157.82 would change the short term technical picture to neutral. That would be a tough nut to crack though as we hold our hypothesis that the ECB’s QE-programme mechanically holds EMU bonds yields down. Greece remains a wildcard. Tomorrow, the Eurogroup meets, but a deal on the final €7.2B aid tranche is not expected.
In the US, weekly claims and new home sales will be released. The earnings calendar is well-filled and a wildcard for trading via stock markets. We believe that the correction lower will continue with the 10-yr yield moving toward the 2.01% resistance level. Technically, the US 10-yr yield trades sideways within the 1.82%-2.01% range since mid-March. We expect no break at least until next week’s FOMC meeting.