The eco calendar heats up with German ZEW

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Global core bonds started the shortened trading week with a fairly dull session, despite a lot of new info. It ended with moderate losses. ECB Draghi & Coeure spoke very dovish over the weekend raising expectations that practical preparations of QE have progressed. Besides these, geopolitical tensions mounted and the US retail sales were very strong, but none of all these items were able to give core bonds firm direction. Following last week’s strong gains and ahead of major technical levels (in yield terms), such a wait-and-see attitude is maybe not so surprising. US and German yields rose by up to 2 bps. US equities rebounded but traded volatile, meaning that it is unsure whether the rebound can go further.

The eco calendar remains well-filled today with the German ZEW indicator, the euro zone trade data, US CPI inflation data, the Empire State index and NAHB housing market index. Fed’s Yellen, Lockhart, Plosser and Rosengren are scheduled to speak and the US earnings season (see calendar) heats up.

Chairwoman Yellen speaks today via video to the Financial Markets conference of the Atlanta Fed and tomorrow she speaks at the NY Economic club. Especially the latter offers an opportunity for Yellen to communicate with markets and the public. Recently, there have been some “misunderstandings” about the Fed’s views on the timing and pace of the next rate cycle. For instance, Yellen said that the Fed might start raising rates 6 months after the QE programme stops, which surprised markets and moved them quite substantially. In the published FOMC minutes, there was no trace of a debate on this item and markets concluded Yellen’s comment was a slip of the tongue. Secondly, the March Fed rate projections shifted considerable higher versus December.
Markets contemplated about a shift in the Fed’s reaction function, but the FOMC minutes unveiled that several governors thought the “dots” (rate projections) misrepresented the view of the FOMC. So, Ms. Yellen may take the opportunity to give some clarifications.

The German ZEW indicator is forecast to have weakened further in April. The consensus is looking for a limited drop from 46.6 to 45.0, which would be the fourth consecutive decline. Last month, there were indications that the Ukraine crisis weighed on sentiment. It will therefore be interesting to see whether the ZEW will be able to regain some ground on easing tensions. In the US, CPI inflation is forecast to have picked up in March, from 1.1% Y/Y to 1.4% Y/Y.

Inflationary pressures however remain muted as the monthly figure is forecast to show a limited 0.1% M/M increase. After significantly higher import prices and PPI however, we believe that the risks for the CPI reading are on the upside too. The Empire State index is forecast to pick up further in April, following the weather-related slack. An increase from 5.61 to 8.0 is forecast, but we hope to see a somewhat stronger pick-up supported by improving weather conditions. Finally, the NAHB housing market indicator is forecast to return to the 50 level, from 47 in March. Buyers traffic probably increased, but still we believe that the consensus might be too optimistic.

The ECB holds its weekly MRO tender and the liquidity absorbing SMP tender. For the MRO €104.6B loans mature, while for SMP the ECB will try to drain €172.5B. Last Friday, banks announced that they would repay €8.27B in LTRO loans. We will comment on the results of the MRO and SMP tenders and their impact on eonia rates/excess liquidity in our Sunset report. We look out whether the combination of liquidity operations can push excess liquidity again towards €100B (now €116B). If so, it will likely keep eonia above 20 bps.

Overnight, Asian equity markets trade mixed. China underperforms on the back of weaker money supply data. The US Note future trades flat, suggesting a fairly unchanged opening for the Bund.

Today, the eco calendar heats up with German ZEW; US CPI and empire manufacturing. We see risks for stronger data and higher inflation, which is a negative for core bonds. However, given yesterday’s muted reaction following the stronger retail sales, we don’t expect much reaction. A whole bunch of Fed speakers are scheduled to speak (see above) and the earnings season heats up. The latter could be important for bond markets via sentiment on equity markets. Yesterday, the equity rebound slightly weighed on bonds. The situation in Ukraine remains a wildcard.

The German 10-yr yield bounced off the lower bound of the 1.5-1.7% trading range, which is also 62% retracement from last year’s May-September up-leg but the danger isn’t over. A break below this level, paves the way for more bond gains/lower yields. In the US, the 10-yr yield tested the lower bound of the 2.6-2.8% range (key support 2.45%), but (technically) more important is the 30-yr yield. It fell below 3.5% key support (38% retracement) and could be the canary in the coalmine if we see the break confirmed. Anyway, high alertness is warranted today and later this week with these key levels under huge pressure.