Bonds crash on Greece and higher EMU inflation

Rates

Yesterday, global core bonds faced severe downward pressure for a second straight session. Greek developments (see below) and higher EMU inflation led to a significant underperformance of the Bund. At the end of the session, the German yield curve bear steepened with yields 2.2 bps (2-yr) to 18.7 bps (30-yr) higher. Changes on the US yield curve varied between +0.8 bps (2-yr) and +8.3 bps (10-yr). On intra-EMU bond markets, 10-yr yield spreads vs Germany tightened up to 7 bps with Greece outperforming (-31 bps). Washington-based Fed governor Brainard was rather dovish, warning that some of the recent economic weakness might not be transitory. She argued that “there is value to watchful waiting while additional data help to clarify the economy’s underlying momentum.” The case for a lift-off is not immediate but it could still come before the end of the year though (reference to December?).

Busy eco calendar, focus on US and ECB meeting

Today, the final reading of the EMU services PMI for May is forecast to confirm the first estimate, which showed a decline from 54.1 to 53.3. Also in the services sector, weakness was mainly based in Germany, which will probably be partly offset by stronger figures from other countries. We believe that the risks might be for an upward surprise, although revisions will probably be limited. EMU retail sales are expected to rebound by 0.6% M/M in April, following a 0.8% M/M decline in March. German retail sales rebounded by 1.7% M/M and also Spanish retail sales were strong and therefore we believe that an upward surprise is not excluded. Also the previous month’s figure might be upwardly revised. Finally in the euro area, the unemployment rate is expected to decline to 11.2% in April following a stabilization at 11.3% in March. In the US, private sector hiring is expected to have picked up in May, following two disappointing figures in March and April. The consensus is looking for an increase in ADP employment by 200 000, up from 169 000 in April. We believe that the risks are for an upward surprise following strong claims. In April, the ADP report was substantially weaker than the official BLS one. The US trade deficit is expected to narrow significantly to a shortage of $44 billion following a sharp widening (to $51.4 billion) in March, which should be a positive sign for Q2 growth. Finally, the non-manufacturing ISM is expected to have weakened slightly in May, from 57.8 to 57.0, following a rebound in April. In line with the manufacturing ISM,we also see upside risks for the non-manufacturing ISM as regional indicators mostly improved, while we also expect a rebound in activity in the services sector following a soft first quarter.

ECB expected to remain very dovish

There are no new decisions expected at today’s ECB meeting, but that doesn’t mean that it won’t be interesting. We get the new ECB staff forecasts and there will be a lot of questions about the comments of ECB Coeuré on the logistics of the purchases programme. Last but not least there is Greece and the attitude of the ECB. We expect ECB president Mario Draghi to keep a dovish stance, but incite governments to do more about economic reform. For a full preview, click here.

Today: More US underperformance ahead?

Overnight, Asian stock markets trade lower despite stronger eco data (Australian GDP and Chinese HSBC Services PMI). Chinese stocks even underperform. The US Note future trades neutral suggesting a neutral opening for the Bund. The Greek situation didn’t change overnight apart from the ELA increase (by €0.5B). Creditors will present their proposal for a deal to the Tsipras government with the aim of an agreement by Friday. As Tsipras already made a counterproposal, it won’t be evident to do so given the short timeframe (e.g. comments Dijsselbloem, Greek government officials).

Today, the eco calendar heats up. Risks, are on the upside of expectations both in EMU and the US. That’s a negative for core bonds. Greek comments remain a wildcard while a dovish ECB is a positive for the Bund. Those are mixed signals. However, Monday’s bearish engulfing signal in the Bund was followed by yesterday’s huge sell-off. It indicates that the upward correction from the May sell-off is over with the Bund now in the 151.44/155.79 sideways range. We believe that the Bund will move further towards the lower bound of the trend channel.

In the US, the Note future suffered from a stronger ISM reading on Monday and followed the Bund lower yesterday. US Treasuries anticipate more data strength this week, keeping September rate hike expectations alive. That’s a negative for the US Note future. Today’s calendar should be able to extend this week’s downleg with ADP employment and US non-manufacturing (risks on the upside). The 125-13 contract low is next support.