The EMU issuance calendar contains German

Rates

Core bonds digest earlier gains

On Friday, bond (and other) markets traded range-bound in a low volume session devoid of important economic data or event news. Bonds digested earlier gains and some investors might not have resisted the call for taking some profit. In a daily perspective, German yields were slightly higher by up to 2.4 basis points at the 5-year, but -0.3 basis points at the very long end. US yields were mixed with yield changes ranging between -1.1 bps at the 5-year to +1.1 bps at the very long end.Peripheral 10-year yield spreads narrowed slightly in Spain and Italian (2-3 bps) and somewhat wider in Greece and Portugal (5-6 bps).

Today, the eco calendar is interesting, especially in the euro zone with the CPI data for June and M3 money supply and credit growth. In the US, the Chicago PMI and pending home sales are on the agenda and Fed’s Williams is scheduled to speak.

On Friday, national inflation data in the euro zone showed a mixed picture. German inflation rose significantly, while Spanish and Belgian inflation slowed further. For the euro zone, the consensus is looking for a stabilization at 0.5% Y/Y. We believe that an upward surprise is not excluded due to price increases in the leisure & entertainment sector ahead of the holidays. Even in case of an upward surprise, inflation is expected to remain very low and below 1% Y/Y in the coming months. Growth in M3 money supply is forecast to stay unchanged at 0.8% Y/Y in May. More interesting are however the lending data. Recently growth in lending to households remained extremely slow, while lending to nonfinancials continued to worsen. After the ECB’s measures early June, it will be interesting to see whether lending to non-financials will pick up in the coming months. In the US, the Chicago PMI is forecast to have dropped slightly in June, following a significant increase in the two months before.

The EMU issuance calendar contains German, Spanish and French auctions. On Wednesday, Germany taps its 1.75% July 2019 OBL for an amount of €4B. On Thursday, Spain taps the Bono/Obligacion market, while France holds its OAT auction. It taps three lines. The 1.75% November 2024, the 2.75% October 2027 and the 2.5% May 2030 for a combined targeted range of €7.5 to 8.5B.

Looking further out the market calendar, there are a lot of interesting items in this (US) holiday-shortened week. First, the US payrolls (Thursday). They might be a little better than expected. However, also the manufacturing ISM (Tuesday) is worth looking at. In the past weeks, the ugly Q1 GDP and the soft durables have raised concerns about the pace of growth in the US economy. Will these concerns evaporate this week? In EMU, the ECB meeting is the highlight, but following last month’s decisions, it might pass this time without much fuss.
Finally, Ms. Yellen delivers a lecture at the IMF on Wednesday. We have no particular reason to expect Ms. Yellen to send a message to the markets. At her post-FOMC press conference, she sounded dovish, downplaying the financial risks and calling recent higher inflation readings noisy. Will she stick to her messages?

Overnight, Asian equities trade positively, even as the newsflow is thin. US Treasuries are unchanged and the dollar is slightly weaker against the euro and yen. German retail sales were weaker than expected, but it failed to affect trading at the onset of the session. The Bund opened a few ticks below Friday’s official close, but in line with the final levels registered in the after-market trading in late US.

Regarding bond market today, the eco data, M3 money supply and Chicago PMI may be bond friendly, but the HICP may be stronger, keeping the economic data in balance. Investors may also remain cautious ahead of eco releases later this week and a wildcard (Yellen’s speech).

Technically, for US Treasuries, the Note future closed above the top of its tight ST sideways range (123-25- 124-23+/25+) and again above the uptrendline (124-30+ today). The 10-year yield is near the key 2.46/40 support. A drop below would be technically very relevant. The Bund has broken above the upper bound on its sideways range and the 10-year German yield is below the 1.29% low. Concluding, the technical pictures for the Bund and the US Treasury Note are bullish. However, the key MT resistances for the US bonds make us think that US eco data should be weak this week to allow US Treasuries to eke out substantial gains.