This week's EMU auction calendar is thin

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On Friday, global core bonds came under modest downward pressure following strong, but in line with expectations, US retail sales. The US yield curve bear steepened with yields flat (2-yr) to 6.7 bps (30-yr) higher. Changes on the German yield curve were somewhat less outspoken ranging between + 1.5 bps (2-yr) and +4.2 bps (10-yr). All in all, the European morning trading session was characterized by sideways trading in a thin range. As US traders entered dealings, the same thing happened as during the past trading days: the US Note future came under downward pressure. US eco data were strong (retail sales & Michigan consumer sentiment) and reinforced hawkish FOMC expectations. The Bund copied the move with a first test of 147.92 support, but it didn’t succeed yet. A break would be the first technical signal that the bull run of the Bund takes a pause. In yield terms, a move above the 1.12% resistance of the 10-yr yield would confirm this picture. On intra EMU-bonds markets, 10-yr spread changes versus Germany ranged between -2 bps and +4 bps.

Today, the eco calendar contains the US industrial production data and Empire State manufacturing index, besides the euro zone trade data. In August, the US Empire State manufacturing index dropped sharply, from 25.6 to 14.7, which was in sharp contrast with the other regional business surveys and especially the national ISM’s. For September, a limited pick-up is expected to 16. We believe however that the risks are for an upward surprise after the strong US confidence data of recent. Industrial production in the US is expected to have increased by a limited 0.3% M/M in August, following a 0.4% M/M jump in July. According to the payrolls survey, hours worked in the sector rebounded after factory closures in July. Following strong confidence indicators in August and robust order data recently, especially in the automotive sector, we believe that the risks are for an upward surprise.

Later this week, event risks will prime. The FOMC meets on Tuesday/Wednesday. Beside the announcement, the FOMC rate projections and the press conference will make it very interesting. Will the Fed adapt its forward guidance? (Preview flash will follow) The Scottish referendum on independence takes place on Thursday and a yes vote could create a lot of volatility, also outside the sterling markets. Finally, the ECB announces the results of its first ECB TLTRO tender. A limited take-up would raise doubts on the success of the ECB’s strategy to fight deflation risks. Finally, the US eco calendar is attractive too, but may be overshadowed by these events.

This week’s EMU auction calendar is thin. On Wednesday, the German Finanzagentur holds a 2-yr Schatz auction (€4B 0% Sep2016). On Thursday, the Spanish treasury launches a new 3-yr Bono (0.5% Oct2017). The French debt agency taps the on the run 2-yr BTAN (0.25% Nov2016), the off the run 5-yr BTAN (1% May2019) and on the run 5-yr BTAN (0.5% Nov2019) for a combined €7-8B. Additionally, they’ll raise €1-1.5B via inflation-linked bonds. This week’s auctions will be supported by a €6.5B Finnish redemption and a €15B Italian redemption.

Overnight, most Asian equity markets trade with a negative bias. Japanese markets are closed (Respect-for-the-aged day). Weakness of WS on Friday evening (ahead of Fed?) and slightly disappointing Chinese eco data (retail sales & industrial production) are the main drivers. S&P raised the Greek credit rating from B- to B (stable outlook) on a better fiscal outlook. This is supportive for Greek bonds today. The US Note future trades flat overnight.

The eco calendar is empty in EMU but interesting in the US with empire manufacturing and industrial production data. Risks are on the upside of expectations which is a negative for bonds. Last week, hawkish FOMC expectations (Fed dots & forward guidance) drove a significant bear steepening of the US yield curve. The German curve copied the move, both because of the ECB’s QE announcement and the developments in the US.
With the Fed decision now two days away, we believe some consolidation is likely. If the FOMC actually delivers, the bear steepening can continue.

Technically, the US Note future broke below the neckline of a double top last week. Targets stand at 123-23+ and 123-10. In yield terms, the US 10-yr yield moved back in the broad 2.5%/3% range with a test of 2.61%/2.66% zone ongoing. For a break higher, a hawkish Fed will be needed. For the German Bund, the bull run seemed to have taken a pause. First support is under huge pressure (147.92) with the German 10-yr yield approaching 1.12% resistance. Believe in the ECB’s QE and a ripple-effect from the US should be able to force a break. But again ahead of the FOMC (and 1st TLTRO), consolidation is likely.