Bonds to go higher today?
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Draghi manages to avoid ECB exit speculation
Yesterday, German bonds largely outperformed US Treasuries, which did very little, as Mr. Draghi managed to avoid speculation on a nearby exit from its Asset Purchase Programme. Mr. Draghi called the recovery increasingly solid and tweaked very slightly the risk assessment on the growth outlook ("moving toward balanced"). However, that contrasted with his comments on inflation, where he saw no sustained increase in underlying inflation dynamics. As inflation and not growth is the ECB mandate, as Mr. Draghi finely said, the ECB kept its policy unchanged, including its forward guidance and repeated that ongoing substantial monetary accommodation was needed and more could be done if conditions worsened. That was more dovish than expected. European bonds rose a bit during the press conference before stabilizing. Well after the end of the press conference, European bonds resumed their upswing to close with solid gains. Equities moved broadly sideways after a weak opening and were temporarily slightly higher after the ECB decision and Mr. Draghi's comments. The euro lost little ground versus dollar and yen, despite the widening spread differential with the dollar.
In a daily perspective, the German yield curve declined by 4.7 bps (2-yr) to 5.7 bps (10-yr). Changes on the US yield curve varied between -1.4 bp (2-yr) and +0.4 bps (30-yr). On intra-EMU bond markets, 10-yr yield spreads narrowed modestly by 1 to 3 bps, Portugal outperforming (-6 bps).
Busy, interesting eco calendar to close the week.
In EMU, HICP inflation is expected to rebound to 1.8% Y/Y for the headline and 1% Y/Y for the core in April from respectively 1.5 and 0.7% Y/Y in March. German CPI surprised on the upside due to service inflation components (linked to late Easter timing), which was the source of the downside surprise in March. Also Spanish inflation surprised on the upside. Therefore, we think that EMU HICP risks are on the upside of consensus. France, Spain and Belgium publish Q1 GDP figures, which allow us to get an idea about EMU growth during Q1. We expect solid figures which may be level or a tad higher than the solid Q4 of 2016 figures. In the US, Q1 GDP and Michigan consumer sentiment are the key releases. Q1 GDP is expected at a disappointing 1% Q/Qa following a 2.1% Q/Qa in Q4 of 2016. While we believe the risks are on the upside of expectations, Q1 growth will nevertheless be disappointing. It does so regularly in Q1 in the past years, suggesting a statistical quirk might be at work.
However, if confirmed markets won't dismiss it completely. Michigan consumer sentiment is expected unchanged at 98 in April. That would keep sentiment near the cycle highs. The Conference Board measure of consumer confidence dropped in April, but had risen more than the Michigan in past months. Therefore, we stick to the consensus view of a stabilization.
Bonds to go higher today?
Risk sentiment is slightly negative overnight. Geopolitical risks surrounding N-Korea spook the equity market, even as Japanese data were mixed and neutral. The yen is a little stronger and US Treasuries are modestly higher. We expect the Bund to open little changed.
The dovish comment of Draghi gave bond bulls some respite after last Sunday's French presidential elections. Looking forward, the eco data might be influential. EMU inflation might surprise on the upside and US Q1 GDP is expected so weak that an upward surprise looks likely. The former is a negative for bonds and may be a wake-up call suggesting that yesterday's ECB meeting might have been the last one in favour of bond bulls. However, also higher US GDP is a bond negative, even if we still expect it to be weak. However? Doubts on its reliability may linger on. Two factors are bond positive. Some end of month extension buying and geopolitical risks ahead of the long weekend. Bunds and Treasuries have space to move higher without encountering key resistance and the Bund may need to close the gap (close before French elections 162.49). So, we position for a bond friendly session today , but without technical implications.
Technically and in a longer term perspective, the US 5- and 10-yr yield recaptured lost support levels (1.8% and 2.3% respectively), which allows them to turn higher in the old trading bands as the Fed prepares another rate hike in June and will start to run-off its balance sheet before the end of the year. The German 10-yr yield is already back in its old 0.2%-0.5% trading range as markets no longer discount a Frexit tail risk. However, today may be different.
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