European elections pause for thought

With US and most European closed, the US future market had a quiet uneventful session yesterday. US Treasuries, that sold off on Friday due to stronger core CPI, basically held a sideways range. The Bund market was closed yesterday, but some peripheral markets were open. The Spanish municipal elections ended with a defeat of the Partito Popular (Rajoy) and the Socialist party and gains for the Podemos and Ciudadanos parties. This weakens the central government that faces national elections in the fall. Italian PM Renzi asked the EU to leave the current austerity policy or risk that fringe parties soon will take the power and disintegrate EU. He faces regional elections next weekend. Finally, the Polish opposition gained the presidential election and the governing parties fear that they will undergo a similar fate at the upcoming parliamentary elections. British PM Cameron will soon start negotiations about a change in the EU workings. Following these electoral results, it puts the EU and euro area under pressure to change policy and that can probably not be ignored. Will Greece profit from it and get a more lenient treatment? We will know soon as Greece has to pay IMF €300M on June 5 and a total amount of €1.5B in June.

US markets reopen after the long weekend with a packed eco calendar: durables, Conference Board’s consumer confidence, the Richmond Fed index, new home sales and house price indices. US durable goods orders have been very volatile over the previous months mainly due to the transportation sector. The underlying picture remained however poor, but in March, durables ex-transportation rose for the first time in six months. In April, headline durables are expected to have dropped by 0.5% M/M, but the ex-transportation component is forecast to increase for a second straight month (by 0.4% M/M). As weather conditions improved and the effect of the lower oil price should start to fade, we believe that the risks are for a stronger reading. Conference Board’s consumer confidence is expected little changed (95.0 from 95.2) following a significant drop in April. Other confidence indicators weakened however further in May and therefore we believe that also the Conference Board’s index might surprise on the downside. The Richmond Fed index is expected to have risen for a second straight month in May, from -3 to 0. While better weather conditions might support sentiment together with the stabilizing USD, the Empire State index and Philly Fed index remained poor in May. Nevertheless, as the Richmond Fed index is still at very low levels, we believe that the risks are for an upward surprise. Finally, new home sales are expected to have rebounded by 5.8% M/M to a total of 508 000 following a sharp 11.4% M/M decline in March. We see risks for a higher outcome.

Dutch 5-yr tap and start US refinancing operation

The Dutch debt agency kicks off this week’s scheduled EMU bond supply by tapping the on the run 5-yr DSL (€2-3B 0.25% Jan2020). The bond didn’t cheapen in ASW-spread terms going into the auction, but it trades relatively cheap on the 5-yr segment of the Dutch curve. Overall, we expect a plain vanilla auction. In the US, the Treasury starts its end-of-month refinancing operation with a $26B 2-yr Note auction. Currently, the WI is trading around 0.655%.

Fed still heading towards 1st rate hike later this year

Fed chairwomen Yellen said she still expects a first US rate hike later this year. “Because of the substantial lags in the effects of monetary policy on the economy, we must make policy in a forward-looking manner. Delaying action to tighten monetary policy until employment and inflation are already back to our objectives would risk overheating the economy. For this reason, if the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy.” Cleveland Fed Mester said that accelerating inflation and strong employment growth are pushing the US economy close to the point where it can support higher interest rates.

Today: Bund more sensitive to Greek developments?

Overnight, Asian stock markets trade positive with China once more outperforming. A Chinese nuclear plant plans the biggest domestic IPO in 5 years while the Chinese regulator further liberalizes capital markets. The US Note future trades stable. The Bund could profit from some upward pressure (risk-off) at the start of trading given political news from Greece/Spain (see above).

Today, the eco calendar heats up in the US though data risk to be a mixed bag. That means additional volatility. Friday’s reaction to marginally higher US inflation proves that the US Treasury market is increasingly sensitive to eco releases. The US T-Note remains in a sideways range (128-04+/12 and 126).
Technical factors like upcoming supply (negative) and end-of-month buying (positive) give no clear indication for trading. The Bund stabilized in recent sessions following the sell-off, but there is no firm signal that the sell-off is over yet. A move above 154.97 (38% retracement) would make the picture more bullish. Greek event risk warrants a test of that level though markets remained stubbornly calm of late vis-à-vis Greece. The downside looks protected with the 151.44 sell-off low as line in the sand.