The consensus is looking for an increase in PPI by 0.2% M/M

Rates

Yesterday, global core bonds eventually eked out additional gains as a new bout of risk aversion flood the market during US dealings. The usual suspects – Crimea, China and Turkey – continue to spook markets. Mixed to better US eco data (retail sales & claims) were ignored. At the end of the session, the German yield curve fell up to 5.5 bps lower (10-yr). In the US, yield changes ranged between -2.4 bps (2-yr) and -8.5 bps (10-yr). Equity markets remained under downward pressure as well, with the Dax now at key support levels in the 9000 area (neckline triple top & lower bound upward trend channel since June 2012).

Today, the eco calendar remains thin with only US PPI inflation data and the first estimate of US U. of Michigan consumer confidence. The ECB will announce the amount of LTRO repayments.

US producer prices are forecast to have extended their very gradual uptrend in February. The consensus is looking for an increase in PPI by 0.2% M/M, while the annual rate is forecast to have stabilized at 1.2% Y/Y. Core PPI, excluding food & energy, is expected to have picked up, from 1.3% Y/Y to 1.4% Y/Y. We have no reasons to distance ourselves from the consensus. Regarding consumer sentiment, U. of Michigan consumer confidence is forecast to have picked up slightly early March, from 81.6 to 82.0, which remains however close to the previous months’ figures. Poor weather conditions had apparently only a limited impact on Michigan consumer sentiment in the previous months. For March, we believe that the risks are for an upward surprise as also Bloomberg consumer sentiment improved over the previous weeks, while economic data seem to have improved somewhat.

ECB President Draghi spoke in Vienna yesterday evening. He sounded more dovish than at last week’s press conference. The main topic was the positive influence of bank deleveraging on the functioning of the ECB’s monetary transmission mechanism (cfr Coeure earlier on the day), but he made some remarkably dovish side comments as well. First of all, he warned about the impact of a strong euro: “The strengthening of the effective euro exchange rate over the past one and a half years has certainly had a significant impact on our low rate of inflation and, given current levels of inflation, is therefore becoming increasingly relevant in our assessment of price stability.” Draghi expected though that the ECB’s forward guidance would prompt a fall in real interest rates and trigger a depreciation of the euro because it would narrow the gap between real interest rates in EMU and elsewhere. Second, he stressed the easing bias of the ECB.

Risks of deflation are quite limited but the longer inflation remains low, the higher the probability that inflation expectations become unanchored. “That is why the ECB has been preparing additional non-standard monetary policy measures to guard against such a contingency and why it stands ready to take further decisive action if needed. Any material risk of inflation expectations becoming unanchored will be countered with additional monetary policy measures.” We would consider Draghi’s comments as important and confirming our view that additional easing remains an option. We believe that the reference to non-standard monetary policy options can even be seen as an opening towards outright QE.

The US treasury concluded its mid-month refinancing operation with a sloppy $13B 30-yr Bond auction. The auction stopped with a 1 bp tail and the bid cover was a little light. Bidding details shower a very small direct bid and a good dealer bid. The aucion followed a weak 3-yr Note auction and a strong $10-yr note auction earlier this week.

Overnight, Asian equity indices trade negative though the impact is modest given European and Wall Street’s losses yesterday. Japanese equities underperform on the back of a stronger yen. The US note future is modestly higher.

Today the eco calendar is thin with only Michigan confidence. While we see risks for a stronger outcome, we don’t expect it to impact trading. Risk sentiment on equity markets will likely drive core bonds again today. The German Dax is close to key support and should tensions ease following this week’s sell-off, it might take away some steam of the bond rally. However, given the volatile trading environment and geopolitical tensions (Crimea, China, Turkey), event risk remains high. Following the outcome of last week’s ECB meeting, we believed that the upside in the Bund was blocked at the recent high. However, we must adapt this thinking following yesterday’s dovish comments by ECB president Draghi in combination with recent safe haven flows.