Today: At last again some eco data of importance

Rates

Ugly markets support core bonds, as stress mounts fast

Yesterday, global core bonds profited once more from safe haven flows.
European equity weakness, amid an ongoing sell-off of financials, rising credit spreads and in particular a significant Portuguese spread widening pushed the Bund (and US Note future) higher. As Portuguese tensions eased (central bank buying?), core bonds lost part of the intraday gains. In a daily perspective, the German yield curve bull flattened with yields 2.8 bps (2-yr) to 8.6 bps (30-yr) lower. Changes on the US yield curve vary between -5.2 bps (2-yr) and -1.2 bps (30-yr). The US 10-yr yield dropped below 1.64% support (1.626%), to the lowest level since 2012 (1.52%). The all-time low stands at 1.38%. Other bond positive factors were a risk warning of SG that negatively affected equities, a Swedish 15 bps rate cut to -0.50%, a sharp rise in Portuguese bonds and credit spreads in general and a new low in WTI oil ($26.05). US initial jobless claims on the contrary were better than expected, but ignored. On intra-EMU bond markets, 10-yr yield spreads versus Germany increased up to 4 bps for the (semi-)core, 11/13 bps for Spain/Italy, 45/70 bps for Portugal and Greece.

In the second leg of her semi-annual testimony, Fed chairwoman Yellen refuted the idea the Fed’s rate hike in December was the reason behind the turmoil in markets since the start of January. She blamed the yuan depreciation and a dive in oil prices as the drivers behind the turmoil. Yellen sounded a bit more dovish than on Wednesday when she said the Fed was assessing the impact of the swings in markets on the economy, but she doubted that would prompt it to reverse course and cut rates. “ It’s not what I think the most likely scenario”. It is too soon she added to know whether those risks are severe enough to alter Fed’s rate policy. Yellen admitted that the Fed was taking another look at negative rates as a potential policy tool if the US economy faltered. In 2010, the Fed had decided that they would not work well, but the experience of European countries has convinced the Fed to take another look. Legal issues still need to be cleared out.

Busy eco calendar

Several EMU countries already published their GDP figures, showing continued strong growth in Spain (0.8% Q/Q), a limited slowdown in French growth (0.2% Q/Q from 0.3% Q/Q), while Belgian GDP picked up slightly (to 0.3% Q/Q from 0.2% Q/Q). This morning, German GDP came out in line with expectations, increasing by 0.3% Q/Q, the same pace of growth as in Q3. For the euro area reading, the consensus is looking for an increase in GDP by 0.3% Q/Q, also the same pace of growth as in Q3. We see limited upside risks to the consensus. In the US, following disappointing end of year sales, retail sales are forecast to have increased slightly in January, by 0.1% M/M. The headline figure will probably remain depressed by lower gasoline prices. As a result, the control group is expected to show a somewhat stronger 0.3% M/M increase. Although personal consumption growth slowed in Q4, a further improvement in labour market conditions, increasing wages and lower oil prices should continue to support spending. We believe therefore that the risks are for an upward surprise, while also more normal weather (less warm) conditions might have supported sales of seasonal goods. The University of Michigan consumer confidence is expected to show a slight uptick in February after a limited decline in January. Overall favourable economic conditions might however be overshadowed by turmoil on financial markets and therefore we see risks for a downward surprise.

Today: at last again some eco data of importance

Overnight, Japanese equities are sharply lower, but this is still mainly catching up after closure. Other open Asian bourses modestly lose ground, not more than WS yesterday. Yen is stable, albeit helped by verbal support of FM Aso (abrupt market moves are undesirable according to G7-20; watch FX with sense of urgency and respond if necessary) and BOJ Kuroda (watching markets closely). US Treasuries trade lower and European equities should open higher. Oil trades higher after setting new low yesterday (WTI). This suggests a weaker opening for the Bund as well and maybe some further correction after the breathtaking rally.

Today’s eco calendar is busy and eventful. We see upward risk for the EMU Q4 GDP and for US retail sales. Economic data have been overshadowed in past month by market turmoil. EMU Q4 GDP is a bit outdated, but a market reaction on a stronger outcome is possible as we have the feeling the upside of the Bund (and US Treasuries) may have become a bit exhausted for now. US retail sales are timelier and a stronger report may be welcomed in riskier markets and embraced as a sign the sell-off is overdone. However, markets may be cautious ahead of the US closed markets on Monday (President’s day) and the return of the Chinese, which are intrinsically bond positives. After weighing all factors, we think that some core bond correction is likely, but it is too early to call it a change in direction. It should be more technical inspired. US T-Note graph (see below) shows a tentative reversal sign. However, longer term sentiment remains positive for core bonds, but heavily overbought, it makes them vulnerable for bouts of short term profit taking.

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