EMU auction calendar fairly thin

Rates

US Treasuries sold off

The correction lower in US Treasuries continued on Friday, while euro area bond markets were closed. US Treasuries headed south from the Asian session and continued to do so in thinly traded UK trading session. During the US session, both Fed governors Mester and Williams hit the wires and sounded a bit more hawkish than could have been expected after last week’s soft FOMC statement. Mester said that the economy is coming back from a soft patch in Q1. She added, just like Williams, that a rate hike is on the table for all FOMC meetings (including June) conditional on stronger eco data. That put US Treasuries under renewed pressure. A strong opening of US equities weighed as well. US eco reports (ISM, construction spending and car sales) were all weaker than expected, but couldn’t generate a bid in the market. So, what cannot go up, must come down. US Treasuries lost further ground before hovering sideways into the end of the session and into the weekend. The Treasury selling might also have been a continuation of the repositioning of previous days. In a daily perspective, the US yield curve bear steepened with yields 2.8 bps (2-yr) to 8.7 bps (30-yr) higher.

Downward revision to EMU PMI?

The eco calendar is thin today with only the final reading of the euro zone manufacturing PMI and the US factory orders. ECB’s Costa, Fed’s Tarullo, Evans and Williams are scheduled to speak and the ECB will announce the amount of assets purchased. UK and Japanese markets are closed.

According to the first estimate, the euro zone manufacturing PMI weakened unexpectedly in April, from 52.2 to 51.9. Weakness was mainly based in the core countries as Germany and France. Ahead of the euro area reading, the national data will already give an indication. We believe that the risks are for a weaker outcome following weaker EU Commission indicators. In the US, the factory orders are forecast to have rebounded by 2.0% M/M led by strong transportation orders, but the underlying picture will probably remain poor.

Later this week, the US calendar heats up with non-manufacturing ISM (Tuesday), ADP employment report (Wednesday) and payrolls (Friday).
Comments of Fed speakers will be scrutinized especially as Mester and Williams didn’t exclude a June rate hike. The EMU calendar remains thin with the final services PMI and national industrial production data. Tomorrow, the European Commission releases its spring economic forecasts.

EMU auction calendar fairly thin

This week’s scheduled EMU bond supply comes from Austria, Germany and Spain. Tomorrow, the Austrian debt agency taps off the run RAGB’s (3.5% Sep2021 & 1.75% Oct2023) for a combined €1.1B. On Wednesday, the German Finanzagentur launches a new 2-yr Schatz (€5B 0% Jun2017).On Thursday, the Spanish treasury auctions the on the run 3-yr (0.5% Oct2017) and 10-yr (1.6% Apr2025) Obligacion, as well as an inflation-linked bond. This week’s auctions won’t be supported by bond redemptions.

Today’s Strategy

Overnight, Asian equity markets trade positive. Gains are less compared to WS on Friday (<1%) because of disappointing PMI’s (China, South Korea). Japanese markets are closed. The US Note future trades sideways around the lows. The Bund market reopens after the long weekend and a weaker opening is likely, catching up with US Treasuries’ downleg on Friday.

Today’s eco calendar is thin. Risks for the final EMU manufacturing PMI are on the downside of expectations. Flows in the Bund will be low with UK markets closed for May Day holiday. Technically, the Bund dropped below the longstanding uptrend line, changing the technical picture to neutral short term. Key support is in the 155.80 (March low) to 155.45 (38% retracement) area. We believe that the correction initially will push through towards these levels. Greece remains a wildcard for trading/risk sentiment with rumours of an extraordinary Eurogroup meeting at the beginning of this week to prepare a May 11 agreement.

In the US, factory orders are second tier for trading. Fed Evans (dove) and Williams (June hike still possible) shouldn’t surprise markets. Technically, the move below 128-04+ in the US Note future suggests also more downside here. However, eco data should be strong (see above). Fed’s Mester and Williams kept the door for a June rate hike open conditional on stronger data. If this week’s payrolls report for example disappoints, the door could rapidly close and put a bottom under the Treasury market.