Core bonds regain momentum
|Core bonds rallied yesterday in a move which lasted the complete session. Disappointing German Ifo Business confidence caused a temporary acceleration. Yesterday's move calls an end to the core bond correction lower in the first half of April, suggesting a return to the end of March highs. The US $41bn 5-yr Note auction went plain vanilla. There was no other specific news to guide trading with investors simply preferring cautiousness given that global economic growth is significantly slowing. Next week's Fed meeting probably also plays in the back of investors' minds. The dollar gained across the board while stock markets remain stubbornly resilient. The German yield curve bull flattened with yields 1.4 bps (2-yr) to 6.2 bps (30-yr) lower. The German 10-yr yield is back in negative territory. US yields declined by 4.7 bps across the curve. 10-yr yield spreads vs Germany widened marginally.
Asian stock markets are mixed this morning with Japan outperforming (+0.5%) and China underperforming (-0.75%). South Korean Q1 GDP growth disappointed (-0.3% Q/Q). The country's economic performance is often seen as a proxy for global exports. The BoJ this morning followed the BoC's example from yesterday by providing a dovish policy statement. Core bonds hover near yesterday's intraday highs.
Today's US eco calendar contains March Durable goods orders and weekly jobless claims. Durables are expected to reflect the ongoing soft patch. Aircraft orders will probably distort part of the report, shifting focus to shipments and inventory details. We think the bar (consensus) is rather low. Weekly jobless claims are forecast to continue hovering near multidecade lows. We don't think that better-than-expected data will be able to break bond momentum. Companies reporting earnings include 3M, Intel, Ford and Amazon. These are wildcards for trading. The ECB's economic bulletin and a speech by vicegovernor de Guindos are worth watching as well.
Long term view: markets concluded that the ECB missed out on this cycle. They even start pondering the possibility of an additional deposit rate cut. The downtrend in the German 10-yr remains in place so far. Regarding Fed policy, markets now discount a 60% probability of a Fed rate cut by December. The US 10-yr yield closed last week above the lower bound of the previous 2.5%-2.79%. This turned the picture more neutral again, but the move lacks conviction.
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