Limited bond gains at start of the trading week

Rates

Yesterday’s eco calendar was enticing, but core bond trading rather dull, as often on Monday. Investors apparently waited for new impetus. In a daily perspective, the German yield curve was barely changed with yields 1.1 bp (5-yr) higher to 1.3 bps (30-yr) lower. Changes on the US yield curve vary a little bit more with yield changes between -3.3 bps (5-yr) and +0.7 bps (30-yr). The outperformance of the front end of the curve (2-5yr) can be attributed to comments by Fed president Yellen at the end of Friday’s dealings. She put the accent more than ever on a very slow, gradual rate hike cycle, while leaving the door open for an earlier than expected lift-off. Also comments by PBOC governor Zhou Xiaochuan who advocated more monetary easing including QE set the stage for strong equity and dollar trading, and gave core bonds trading temporarily some fillip. EMU and US eco data were in line with expectations are even stronger, but couldn’t trigger a directional move. On intra-EMU bond markets, 10-yr yield spreads versus Germany are modest with Spain outperforming (-5 bps) and Greece underperforming (+14 bps).

The eco calendar remains interesting today with the first estimate of EMU HICP inflation for March, the euro zone unemployment rate and Conference Board’s consumer confidence and the Chicago PMI in the US. Fed’s Lacker, Lockhart, Mester and George are scheduled to speak together with EU’s Nouy.

In February, euro zone HICP inflation picked up from its record low level of -0.6% Y/Y to -0.3% Y/Y, supported by an uptick in the oil price. For March, the consensus is looking for an increase from -0.3% Y/Y to -0.1% Y/Y and we believe that the risks are for another upward surprise. Although oil prices dropped slightly in March, strengthening domestic demand and the early timing of Easter will boost prices. The EMU unemployment rate is expected unchanged at 11.2%, following a slight drop in the previous three months. For the unemployment rate, we see risks for a lower outcome as the labour market recovery has continued. In the US, Conference Board’s consumer confidence is expected to have stabilized at 96.4 in March following a significant decline in February. Favourable weather conditions and the continuing improvement in the labour market should have supported consumer sentiment. In recent weeks, also Bloomberg consumer confidence started to rebound. The Chicago PMI plunged sharply in February and is expected to reverse part of the drop in March. As weakness in February was partly related to the port closures, a rebound is likely in March with risks to the upside of expectations.

Overnight, Asian stocks trade positive with Japan slightly underperforming despite a weaker yen and decent data. Fed Vice-President Fischer talked but he focused on regulating nonbank financial companies. The US Note future trades marginally higher this morning.

Today, the eco calendar is well-filled. Risks for eco releases are tilted to the upside of expectations (see above). Especially US eco data will be closely watched, but the impact on markets might be muted ahead of the ADP report, manufacturing ISM and US payrolls. Since the dovish FOMC-meeting, sentiment turned in favour of US Treasuries and stronger data this week will be necessary to keep US yields above key levels (1.4% 5yr & 1.94% 10yr). Otherwise, we could be heading to the cycle lows. Fed speakers are plenty with Lacker, Lockhart, Mester and George. All 4 of them have a (relatively) hawkish profile which could colour today’s trading but doesn’t reflect the majority on the FOMC board.

In Europe, Greece remains a factor of uncertainty as talks on the reform list again prove to be very difficult. Overall, the technical picture for the Bund remains bullish. The ECB’s PSPP-programme should keep the upward potential of yields limited.