The focus will be on the German HICP inflation data for March

Rates

On Wednesday, global core bonds had a rather quiet trading session. Eco data couldn’t cause significant moves. German Bunds outperformed US Treasuries, as investors clearly fear the outcome of today’s German inflation numbers and Monday’s EMU figures. At the end of European trading, the German Bund came very close to the contract high at 143.97. On a daily basis, the German yield curve shed 2.2 bps (30‐yr) to 3.2 bps (10‐yr). In the US, yield changes were more modest, ranging between +0.4 bps (2‐yr) and ‐1.6 bps (30‐yr). The US 30‐yr yield nevertheless tested key support around 3.5%.

Today, the focus will be on the German HICP inflation data for March, which give a preview for the EMU data on Monday. Furthermore, EC’s confidence indicators, US personal income and spending and the final reading of US Un. of Michigan consumer confidence will be released. The ECB announces LTRO repayments and ECB’s Weidmann and Fed’s George are scheduled to speak.

In Germany, HICP inflation is forecast to have eased slightly in March, from 1.0% Y/Y to 0.9% Y/Y. On a monthly basis however, inflation is expected to have increased by 0.4% M/M. The relatively late timing of Easter will probably keep inflationary pressures limited in March, before picking up in April. Base effects are limited for Germany, contrary to the EMU measure, and we believe that the annual rate might even surprise on the upside. EC’s economic confidence is forecast to extend its uptrend in March, rising from 101.2 to 101.4, which if confirmed would be the 11th consecutive increase. The headline figure will probably be supported by a strong rebound in consumer sentiment, which was already shown by the first estimate. Therefore, we believe that the risks are for an upward surprise. In the US, both personal income and spending are expected to have increased by 0.3% M/M in March. Also interesting will be the PCE deflator. A limited 0.2% M/M rise is estimated, which would push the annual rate down to 0.9% Y/Y. We see risks for an upward surprise supported by higher prices in the services sector. The final reading of Michigan consumer sentiment is expected to show a limited upward revision, from 79.9 to 80.5, after the first estimate surprised on the downside. After the strong Conference Board’s reading, we see risks for a stronger upside revision.

Overnight, NY Fed Dudley and Chicago Fed Evans spoke. Dudley refrained from commenting on monetary policy but said that the Fed should be watchful for ripple effects from emerging markets. Evans was dovish as usual, saying monetary policy is highly accommodative and needs to remain so for some time (risks outweigh costs!). Only high inflation would force his hand, but he sees this risk as very low.

The US Treasury finalised its end‐of‐month refinancing operation with good $29B 7‐yr Note auction. The auction stopped well below the 1:00 PM bid side and the bid cover was very close to the average over the prior year (2.59 vs. 2.57). A good direct bid led a solid overall buy side demand. This auction followed strong 2‐yr, 5‐yr and 2‐yr FRN Note auctions earlier this week.

The Italian debt agency taps the on the run 5‐yr BTP (€2‐3B 2.5% May2019) and 10‐yr BTP (€3‐3.75B 3.75% Sep2024). Especially the 10‐yr BTP trades rather rich on the 10‐yr part of the Italian curve. Nevertheless, compared to Spanish Bono’s/Obligacions, there is still some pick‐up. Adding the ongoing strong sentiment towards the periphery, we therefore believe the auctions should be okay. The total amount of BTP’s on offer is also the lowest since last year. Additionally, Italy will try to raise €2.5‐3.25B with the launch of a new 5‐yr CCTeu (Nov2019).

Overnight, most Asian equities trade positive with a Chinese underperformance amid growth supportive talk by President Keqiang. Japanese eco data were stronger but didn’t influence trading. Comments by Fed Dudley and Evans (see above) couldn’t inspire trading.

Today, the eco calendar heats up. The main item will be German inflation numbers. We see risks for a higher outcome, which is negative for core bonds. Other eco numbers could surprise on the upside, which could add to selling. Technical factors, like end of quarter buying and the end of the Japanese fiscal year might cause some intraday gyrations.

Technically, the Bund tested the contract high yesterday after dovish ECB comments earlier this week and in anticipation of (lower) inflation numbers and next week’s ECB meeting. In the German 10‐yr yield, we are close to 1.5% key support. Therefore, today and Monday’s outcome will be extra important, but we don’t anticipate a break. The US Note future is trading near the middle of a sideways range, awaiting the outcome of next week’s eco releases. The technical picture of the US 30‐yr yield (see above) sends a first warning signal though.