Apple and Fed revive reflationary spirits
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Apple and Fed revive reflationary spirits
Global core bond trading was uneventful during yesterday’s European trading session. Dynamics changed in US dealings when core bonds lost ground. US Treasuries underperformed German Bunds. Surging US equities on Apple headlines, hawkish comments by voting Fed-member Mester (3 or more hikes in 2018) and an upbeat assessment of the US economy in the Beige Book contributed to the move. The market implied probability of a 3 rate hike scenario in 2018 rose above 50% for the first time. US yields increased between 2.9 bps (2-yr) and 5.7 bps (7-yr) on a daily basis. The US 2-yr yield rose further above 2%, to the highest level since 2008. The 5-yr yield is very close to 2.42% resistance (2011 top). The German yield curve ended virtually unchanged compared to Tuesday’s close. 10-yr yield spread changes versus Germany were marginal with Italy (+3 bps) underperforming.
Asian stock markets started strong in line with WS yesterday, but several indices grind lower into the Asian close. Japan underperforms (-0.5%). The US Note future trades stable, suggesting a neutral opening for the Bund.
Today’s eco calendar heats up in the US with housing data, jobless claims and Philly Fed Business outlook. Activity data failed to impact trading lately. Apple’s announcement might dominate headlines and revive reflationary spirits (negative US Treausies). US Congress faces a January 19 deadline to reach a spending deal and avoid a government shutdown. A final agreement is unlikely and Republicans will probably consider a stopgap spending bill and short term extension until Feb 16. In previous government shutdown spells, which is not our base scenario this time, US Treasuries tended to profit from safe haven flows. Speeches by ECB members (Weidmann, Coeuré and Villeroy) are potentially interesting. Several ECB members tried to talk the euro lower recently, dampening speculation that the ECB could already change its communication strategy at next week’s meeting and causing an outperformance of the Bund vs the Note future.
Technical considerations remain at play as well for the Bund and US Note future. German yields are close to resistance levels, respectively at -0.55% (2-yr), -0.06% (5-yr), 0.62% (10-yr) and 1.38% (30-yr), but a break higher is unlikely ahead of next week’s ECB meeting. We argue in favor of some consolidation near the highs (in yield terms). Medium term, we closely follow German trade union negotiations about pay rises. German wages are expected to be pivotal to start an upward spiral in EMU price dynamics and could be a bearish signal for Bunds. Strong global growth, rising inflation expectations and the global push to monetary normalization are bearish factors for bonds medium term. The US 10-yr yield’s new trading range is between 2.5% and 2.63% (2017 top).
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