The eco calendar is thin with only US durable goods

Rates

Yesterday, global core bonds held a relatively tight trading range amid a mixture of conflicting factors. Risk‐on was a negative, but comments of ECB Weidmannn, Makuch, Liikanen and even Mr. Draghi (see yesterday’s Sunset report) showed that the debate on more supportive policy action is not closed despite conflicting signals at the March meeting. The market reaction was lukewarm though, as markets were wrong‐footed ahead of the March meeting by similar hints. As a consequence the 2‐5‐yr part of the German curve outperformed the longer end. 2‐ and 5‐yr yields dropped by 1 to 1.7 bps, while yields at the longer end were virtually unchanged. The US curve yield curve steepened as well with 2‐to 5 yr yields less than 1 bp down versus +2/3 bps further out. It follows a post‐FOMC flattening.

Today, the eco calendar is rather thin with only US durable goods orders, besides some second‐tier eco data as the US Markit Services PMI and Italian consumer sentiment. Attention will also go out to the US‐EU Summit in Brussels, attended by President Obama, while Sweden (Bond), Italy (CTZ) and the US (5Yr Notes and FRN) will tap the market.

Following two consecutive monthly declines, US durable goods orders are forecast to show a limited rebound in February. The consensus is looking for an increase by 1.0% M/M, partly due to strong transportation orders. Durables ex transportation are forecast to show a more limited increase (by 0.3% M/M), following already a rebound in January. The headline figure will probably be supported by Boeing orders, which picked up after the Singapore Airshow.
Excluding transportation however, we see downside risks as weather conditions remained poor and therefore we believe that we might see some payback following the rebound in January.

St‐Louis Fed Bullard repeated this morning his comments of Monday. Also Philly Fed Plosser, a hawk, talked. He showed again his preference for a rule‐based policy over a decision founded on discretion. He unveiled the value of his “dots” in the FOMC rate projections. He sees the Fed funds rate at 3% in 2015 and 4% in 2016, which is the highest for 2015 and the second highest in 2016 of the 16 voting governors. So, he confirms his credentials as a hawk. Interestingly, he said the use of the new (under test) repo deposit facility hasn’t yet been endorsed. He is right, but chances remain high, we think, that it will nevertheless be the main tool to absorb excess liquidity in the run‐up to the first rate increase, whenever that takes place. All in all interesting, but given his position as an FOMC outsider its impact on market should be limited.

The US Treasury started its end‐of‐month refinancing operation with a strong $32B 2‐yr Note auction. The bid cover was a little light (3.20 versus 3.33 average over the past year) but the auction stopped well through the 1:00 PM bid side. Bidding details revealed strong bidder takedown figures for both Indirect and Direct bids. The Dealer bid dried up though. Today, the Treasury continues with a $13B 2‐yr FRN auction and a $35B 5‐yr Note auction. Currently, the WI of the latter is trading around 1.755%.

Overnight, most Asian equities trade positive with a Chinese underperformance. Fed Bullard and Plosser spoke but their comments were very similar to their rhetoric yesterday (see above). The US Note future and USD/JPY trade flat, so we expect a neutral Bund opening.

Today, the eco calendar is thin with only US durable goods. A mixed report is expected as transportation orders will likely boost the headline figure whereas the underlying picture remains weaker. Given the current technical picture, there is thus little reason for the US Note future to break the downside of the 123‐15+/125‐06+ trading range, which remains under threat though.

Technically, the US Note future is testing 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, but this week the eco calendar is still light. Maybe not important enough for markets to break out of the current range. A break below/above these technical levels paves the way for a return to 121‐ 08+/3% (10‐yr yield). For the Bund, the picture is more nuanced as the possibility of more monetary easing by the ECB remains alive (cfr yesterday’s dovish comments by Weidmann, Liikanen, etc…) and technical key levels are further away (Bund 141.81 support). After the FOMC message last week, we favour the downside (higher yields), but time may not be ripe. Effects on Bunds may be modest and not yet technically relevant.