The US eco calendar heats up with the jobless claims

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Yesterday’s trading session on global core bonds markets was one big yawn ahead of the FOMC verdict and Yellen’s press conference. The EMU/US eco calendars were empty and a slightly weak Bund auction. After European trading, things heated up as the FOMC cut tapering by $10B/month, changed the forward guidance, sounded more hawkish in the summary of economic projections and drastically changed its statement. At the press conference, Yellen said that “something on the order of around six months or that type of thing” will be between ending QE and starting to raise rates. Given that we expect the Fed to end tapering QE in October, this brings the lift off data seriously forward previous market expectations. Ahead of the FOMC, the Fed funds strip curve discounted a first rate hike in October 2015. After the meeting, the curve bear steepened and now markets discount a first hike in August 2015. Global core bonds fell significantly lower following the Fed’s message. The US 2-yr yield added 7.3 bps, the 5-yr increased by 16.1 bps, the 10-yr by 10 bps and the 30-yr by 4.4 bps. For a complete review of the FOMC meeting, please read our flash report.

Today, the US eco calendar heats up with the jobless claims, Philly Fed index and existing home sales. EU leaders will start their two-day Summit in Brussels, Spain (Bono & Obligacion), France (BTAN & OAT) and the US (10Yr TIPS) will tap the market and the Swiss central bank will decide on rates.

In the week ending the 8th of March, US initial jobless claims dropped further, from 324 000 to 315 000, to reach their lowest levels since November. For this week’s data, the consensus is looking for a limited uptick to 322 000. We have no reasons to distance ourselves from the consensus, although we expect the downward trend to remain in place following a weather related uptick in the previous month. In February, also the Philly Fed index suffered from poor weather conditions. The index dropped from 9.4 to -6.3, but is expected to reverse most of the plunge in March. An increase from -6.3 to 3.2 is forecast, but we believe that the risks are for an even better outcome. After having peaked in July, US existing home sales fell back sharply in the previous months.
Weather conditions, but also a lack of supply weighed on sales recently. For February, the consensus is looking for a further, albeit limited drop, by 0.4% M/M, to 4.60 million. We believe that the risks are for an upward surprise after the poor data of recent.

Spain and France conclude this week’s scheduled EMU bond supply. The Spanish treasury taps the on the run 3-yr Bono (2.1% Apr2017), 5-yr Bono (2.75% Apr2019) and 15-yr Obligacion (5.15% Oct2028) for a total amount of €4-5B.
The bonds didn’t really cheapen going in the auction and trade quite normal on the Spanish curve. Recently, Spain outperformed versus Italy and the Spanish curve trades below the Italian one. Nevertheless, sentiment towards the peripheral bond markets remains strong and should be supportive for the auction. The French debt agency taps two off the run 5-yr BTAN’s (2.5% Jul2016 & 1% Jul2017) and the on the run 5-yr BTAN (1% May2019) for a combined €7-8B. Additionally, they’ll try to raise €1-1.5B via inflation-linked bonds. French auctions tend to go well and we don’t expect difficulties today either.

This morning, Asian equity markets are firmly lower copying WS losses after the hawkish Fed message. The Chinese yuan remains under pressure and falls to its weakest level against the dollar over the past year. Chinese corporate defaults remain a worrying theme.

Today, markets will further digest the hawkish Fed message. The US Note future tested the downside of the 123-15+/125-06+ channel and the 10-yr yield the upside of the 2.6-2.8% range. We believe that following the FOMC statement, US eco data will become very important. Stronger eco data could push bonds further lower. In that respect, the EMU calendar is empty today, but in the US we get Philly Fed, weekly claims and existing homes sales. A break below/above these technical levels paves the way for a return to 121-08+/3%. For the Bund, the picture is more nuanced as the threat of more monetary easing by the ECB remains. In EMU, a 2-day summit starts. Ukraine and the banking union will be topic of discussions but first results are only expected after today’s trading.