The ECB holds its weekly MRO tender

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Yesterday, technical factors and risk sentiment played first fiddle on bond markets. Eco data were relegated to second fiddle. Both the Bund and the US Note future profited from end-of-quarter buying and a deterioration of risk sentiment (equities up to 1% lower). After the European closure, little happened. The US Treasuries moved in a tight sideways trading range, just below key 125 resistance, undisturbed by the Dallas Fed manufacturing survey. The latter was fairly strong, also in its employment and wage components. In a daily perspective, the US yield curve bull flattens with yields 0.4 bps (2-yr) to 4.9 bps (30-yr) lower. The German yield curve showed a similar flattening, but with marginal yield changes of maximal 1 basis points. On intra-EMU bond markets, 10-yr yield spreads versus Germany add up to 6 bps (Spain). Upcoming supply, risk off sentiment and the Catalonia referendum explain the underperformance. Greece is even worse off (+27 bps) due to concerns over Greece’s desire to exit the bailout early and a missed deadline for reporting revised deficit data.

Today, the eco calendar remains interesting with the euro zone unemployment rate and the September HICP inflation, the German unemployment figures, US Chicago PMI, Conference Board’s consumer confidence and S&P Case Shiller house prices. ECB’s Nowotny and Fed’s Powel are scheduled to speak. The ECB holds its MRO tender (see lower).

In the euro zone, the unemployment rate is forecast to have stabilized at 11.5% Y/Y in August, after already a stabilization in July. We have no reasons to distance ourselves from the consensus. The first estimate of euro zone HICP inflation for September is forecast to show a further slowdown in inflation to 0.3% Y/Y from 0.4% Y/Y. Yesterday, German inflation surprised on the upside, while also Spanish inflation edged somewhat higher. Contrary to the German inflation data however, base effects for the euro area are quite negative. Therefore, we believe that an upward surprise is unlikely. In the US, Conference Board’s consumer confidence is expected to stay broadly unchanged in September, after reaching a new post-crisis high in August. Recently, Michigan consumer confidence improved further, while the weekly Bloomberg indicator dropped lower in the latest week. After the poor payrolls report, we believe that the risks are for a downward surprise. Finally, the Chicago PMI is expected to have dropped slightly, from 64.2 to 62 in September, after a sharp increase in August. This month, most regional business confidence indicators came out quite strong and therefore also the Chicago PMI might surprise on the upside.

The ECB holds its weekly MRO tender. Last week, 135 banks asked for €90.3B of liquidity. That was relatively low, especially given the low take-up at the first TLTRO. Tonight we’ll report on the outcome and implications for eonia and excess liquidity (currently €128B). Eonia is fixed negative again, but will most likely show an end-of-quarter ultimo today.

Overnight, most Asian equity markets trade mixed. Japan and Hong Kong underperform. In general, the pro-democracy protests in Hong Kong are a negative for risk sentiment, but hadn’t much overall impact till now. The HSBC Chinese manufacturing PMI was downwardly revised (50.5 to 50.2). Japanese data were a mixed bag with weaker industrial and vehicle production, but stronger retail sales, labour cash earning and a declining unemployment rate. The US Note future trades with a marginally downward bias.

Today, the eco calendar includes EMU CPI data. The disinflationary trend in set to continue with a further slowdown to 0.3% y/y. That’s in line with expectations and shouldn’t be a market driver. During US dealing, the Chicago PMI (upward surprise?) and consumer confidence (downward surprise?) are up for release but expected mixed. Eco data are thus likely to play second fiddle again. Sentiment on equity markets and, to a lesser extent, some last minute extension buying may be the main driving forces. However, we wouldn’t be surprised if flows thinned ahead of ECB & the big US eco releases.

Overall, this week will likely magnify the divide between EMU and US. In EMU, inflation data are expected to fall further and the ECB will announce details of its ABS and covered bond buying programmes. In the US, the main eco releases of the month are up for release. More robust data (ISM’s, ADP, payrolls) take the Fed closer to the exit. On the bond market, the former (EMU) is positive, while the latter (US) is a negative factor. We hold on to our main view that the ongoing US recovery and normalization of Fed policy prime. This will have ripple effects to Europe as well. Given the ECB stance, damage for the Bund might be contained though.