Markets: Fixed Income
On Friday, global bonds extended Thursday’s evening’s rebound, now that the Treasury supply is out of the way and the 4% level in US 10-year yields proved a hurdle too high. The data were also bond friendly, but played no major role of importance, as the euro zone industrial production data surprised on the downside and the US import prices and Michigan consumer confidence were slightly lower than expected.
In a daily perspective, the US and German yield curve shifted around 5-6 basis points lower. The intra-EMU sovereign spreads traded mixed.
Surge in longer-term yields over for now?
Today, the euro zone calendar contains the euro zone first quarter employment data. The employment data are rather outdated and therefore no market impact is expected. Today’s US data are more up to date with the first regional business confidence indicator for June and the NAHB housing market index (June). The NY Empire State manufacturing index improved significantly over the previous two months (- 4.55 from -38.23), but for June the consensus is looking for a slight deterioration (-6). We have no reasons to distance ourselves from the consensus as a slight deterioration is not excluded after the recent surge. The NAHB housing market index is forecasted to extend its upward trend from 16 to 17 in June.
Later this week, both in the euro zone and in the US the CPI inflation data and first confidence indicators for the month June are scheduled for release. In the euro zone, the first estimate of May CPI inflation came out flat, well below the consensus estimate. The final figure is expected to confirm this outcome and core CPI is forecasted to drop to 1.6% Y/Y after the uptick in April. In the US, CPI inflation dropped below zero in March and is forecasted to extend its downward trend in May. The consensus is looking for a figure of -0.9% Y/Y and core CPI is expected to come out at 1.8% Y/Y (from 1.9% Y/Y). The German ZEW index is forecasted to extend its impressive rally in June. The consensus expects an outcome of 35.0 (from 31.1), but more important might be the development in the current situation index, which dropped last month to a new cyclical low (-92.8). Contrary to the NY Fed, the Philadelphia Fed is forecasted to extend its upward trend in June (-17.4 from -22.6). Also the housing starts and building permits (May) are scheduled for release. Both indicators are forecasted to show a small uptick in May after falling to a new record low in April. US industrial production is expected to show its seventh consecutive contraction in May.
On the supply front, Ireland (3- and 7-year on Tuesday), Germany (2-year on Wednesday) and France (BTAN and OATi on Thursday) are planning to tap the market this week. In the US, there are no auctions scheduled, but the Treasury will detail next week’s auctions on Thursday. Hence, supply will be much less compared to last week and will mainly focus on the shorter end of the curve, which should support the long end.
There are also a lot of central bankers scheduled today and in the course of the week. We however don’t expect them to break new ground. The ECB has adapted a wait and see stance and is looking whether their recent drastic decision will prove sufficient to support the economy. In the US, the next FOMC meeting on 23-24 June is drawing closer and currently the Fed keeps all options open, including an increase in the Treasury purchases. Uncertainty should prevent investors from becoming too aggressive in pushing yields ever higher.
Regarding trading, following the symbolic test of the 4% level in US 10-year yields, the sell-off on the government bond markets has eased and bonds rebounded quite sharply. This week’s inflation data, supply as well as the upcoming FOMC meeting, should all be favourable for the long end of the curve. This should cap the recent surge in yields and prevent US and German 10-year yields from breaking above the key technical resistance levels at respectively 4% and 3.70%. However, as long as global market sentiment (equities and commodities) remains positive, the chance on a downward correction in yields remains remote
In the UK, the calendar is empty today, but on the supply front the DMO is expected to issue its new 25-benchmark via syndication. It will be the first Gilt, since the 50-year benchmark issued in 2005, that will use syndication reflecting the difficulties the DMO is facing to sell the record amount of Gilts this year.
