Attention to US eco data and Fed speakers

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Attention to US eco data and Fed speakers

On Tuesday, global core bonds traded slightly (Germany) to modestly (US) lower. The US yield curve bear steepened marginally (yields up to 3.7 bps higher) going into major eco releases with ADP & Non-manufacturing ISM today and payrolls on Friday. The only noticeable (down) move started at 18:00 CET. At that time a big $21B US corporate deal was priced. Some might have expected support from the rate lock unwinding, but when it didn’t occur, Treasuries were sold. At the same time, equities rebounded, which might have played a role too. Anyway, the move was technically irrelevant, but it brought the T-Note future closer to key 126-10 support and the 10- yr yield to 2.16% yield resistance. Changes on the German yield curve were negligible. On intra-EMU bond markets, yield spreads widened modestly, while Greece outperformed (-7 bps). Comments by Spanish FM de Guindos on a third Greek bailout got more attention. The Greek 10-yr yield spread outperforms, narrowing 12 bps.

The eco calendar heats up again today with the euro zone (final) services PMI, the euro zone retail sales, US ADP employment report and US nonmanufacturing ISM. Fed’s Evans, George and Fisher are scheduled to speak and the Fed publishes its Beige Book.

The euro zone services PMI rose for a third consecutive month in February (preliminary report). The headline index rose from 52.7 to 53.9 and the final reading is forecast to confirm this outcome. We have no reasons to expect a material change from the final reading. In January, retail sales are expected to have increased for a fourth straight month. (consensus 0.2% M/M rise), but after strong data from Germany, Portugal and France, we believe that the risks remain for a stronger reading, indicating that consumers continued to spend at the start of the new year. In the US, the non-manufacturing ISM is forecast to stay broadly unchanged in February for the second month in a row (decline from 56.7 to 56.5 expected). The manufacturing ISM, on the contrary, felt no impact from bad weather conditions. As a result, we believe that an upward surprise is not excluded. Finally, the US ADP employment report is expected to show an increase in private sector hiring by 220 000 in February, up marginally from the 213 000 gain in January. It will be interesting to see whether bad weather conditions and the port strikes had an impact on hiring. For these factors, we see risks for a downward surprise.

Overnight, Asian stocks trade mixed with China outperforming and Japan underperforming. Chinese HSBC Services PMI improved from 51.8 to 52 while the Japanese PMI deteriorated significantly (51.3 to 48.5). The RBI unexpectedly cut its policy rate. The US Note future trades marginally lower but we expect a neutral opening for the Bund.

Today’s eco calendar heats up. Focus will be on US data with ADP employment report and US Non-manufacturing ISM. Risks are for a mixed outcome (see above). Given recent sentiment (hawkish Fed comments, ignoring softer data), markets might again focus on the better reading of the two. That could push the US Note future further to the downside of the sideways trading range (126-12 – 128-04+) going into the payrolls. 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. Apart from the data, Fed speakers include George (hawk), Fisher (hawk) and Evans (dove). Especially the latter will be interesting. The slightest hawkish shift of the ultra-dove won’t pass unnoticed.

Ahead of the ECB meeting/ECB QE purchases, we also expect more range trading for the Bund. The current range is between 157.97 and 159.54/ 160, but investors are gradually switching from the March contract to the June contract (155.80 – 157.27/157.77). The technical picture nevertheless remains bullish. Longer term, the ECB’s QE programme is expected to cap upward potential from EMU bond yields.