Rates

Global core bonds ended flat (Germany) to somewhat higher (US), as equity markets stabilized following Monday’s beating. German inflation turned negative again and put an intraday bottom under the Bund market. US house prices were a bit soft, but consumer confidence surprised on the upside. The latter temporarily pushed core bonds lower, but month-end extension buying pushed especially US Treasuries higher. Equities finally closed narrowly mixed. In a daily perspective, German yields were virtually unchanged, while the US yield curve shifted lower with the belly slightly outperforming and yields 2 to 4.4 bps lower. On intra-EMU bond markets, 10-yr yield spread changes versus Germany dropped 3 bps in Spain and Italy with Portugal outperforming (-8 bps).


EMU inflation and unemployment and Chicago PMI

Following a stabilization in August, EMU inflation is expected to have dropped in September to 0% Y/Y from 0.2% Y/Y in August. Yesterday, German inflation dropped to a below consensus -0.2% Y/Y (from +0.1% Y/Y previously), while also Spanish inflation surprised on downside, easing further from -0.5% Y/Y to -1.3% Y/Y. So, there is a downside risk to market consensus for the EMU inflation, but it shouldn’t be a surprise Also in the EMU, the unemployment rate is expected to stay unchanged at 10.9%. We believe however that the risks are for a limited drop. In the US, the Chicago PMI is expected to drop slightly for September. Market consensus expects the PMI to drop from 54.4 to 53.0. We believe that the risks are for a limited increase, following a marginally better than expected Markit PMI report. The ADP employment report is expected to have stabilized at 190K, slightly below the two year average. Initial claims were very strong in recent weeks, but we hesitate to distance us from consensus.


Finland taps very long end

The Finnish treasury taps two long-dated RFGB’s for up to €1B (0.75% Apr2031 & 2.625% Jul2042). In the run-up to the auction, both bonds cheapened around 5 bps in ASW-spread terms. At the very long end of the Finnish curve, the Apr2031 RFGB (launched earlier this year) trades cheap. After this auction, Finland raised more than 70% of this year’s funding need.


Today: More neutral trading ahead of payrolls?

Overnight, Asian stock markets recover from yesterday’s beating with Japan outperforming despite weaker industrial production data and retail sales. The US Note future trades with a downward bias, suggesting a slightly weaker opening for the Bund as well.

Today’s eco calendar contains US ADP, Chicago PMI and EMU CPI. EMU inflation is expected at 0.0% Y/Y with risks on the downside of expectations. In that case, there could be plenty of headlines about negative inflation and the need for the ECB to step up its QE-programme. That’s a positive for the Bund, but after the German and Spanish CPI’s, a below consensus figure is likely. Risks for US eco data are on the upside of expectations, but the impact (weaker US Treasuries) might be limited ahead of Friday’s payrolls.
Risk sentiment on equity markets is still fragile and remains a wildcard for trading. Uncertainty about the 2016 budget can still cause a US government shutdown (1 October) but House speaker Boehner indicated that a deal was highly likely. Taking everything into account, we are neutral for today’s trading.

More general, both the ECB and the Fed hang on to very easy policies. The Fed keeps extending its ZIRP while the ECB keeps the door open to additional QE. Therefore we believe that recent lows (Bund: 152.75; US Note future 126-16+) put a floor under the core bond market. While a return towards the recent highs (Bund: 156.84; US Note future 129-10+) is likely, we don’t turn outright bullish bonds. Range bound trading can be expected.

This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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