EMU PMI's and ECB rumours don't influence bonds
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EMU PMI's and ECB rumours don't influence bonds
Global core bond markets ended the week in the same vein as the previous 4 trading sessions: with range-bound, technically-inspired, neutral dealings. US yield changes ranged between flat (2-yr) and -0.5 bps (10yr), while the German very long end of the yield curve underperformed (+2.2 bps). The EMU PMI's were mixed in June, but they remained at an elevated level suggesting accelerating growth in Q2. The PMI price components fell to the lowest level in 5 months and confirm the ECB's reluctance in normalising monetary policy. Markets didn't react on the release and seem to be counting down to the Summer holidays. Sources indicated that scarcity of German government bonds is a key consideration for the ECB when deciding on extending its QE-programme. This scarcity limits the possibility of a major extension. Markets didn't react, but if this idea gains traction it could send German bonds lower. On intra-EMU bond markets, 10-yr yield spread changes versus Germany narrowed up to 3 bps (Spain/Ireland).
Fed comments mixed
Cleveland Fed Mester, a hawk, stands behind the Fed's policy of gradually raising rates. She said it's not to slow the economy, but to keep the expansion sustainable. Recent inflation figures haven't changed her outlook, as she sees weaker inflation as only temporary. She also favours the start of the Fed's balance unwinding this year. SF Fed governor Williams also made the case for further gradual rate increases as he expects inflation the hit the Fed's 2% target next year. St-Louis Fed Bullard preached patience and called the Fed's projected rate path unnecessary aggressive.
German IFO and US durables main eco releases
The June German IFO business sentiment is expected to be virtually unchanged. In May, sentiment matched the 2011 high, which was also the highest level since the reunification in the early nineties. Given the weakening of the services PMI there are some downside risks, even as the composition of both measures of sentiment and the surveyed population are different. The US durable orders are expected to have dropped by 0.6% in May, following a drop in April, but strong readings in February/March. The more important orders excluding transportations are expected to have rebounded by 0.4% M/M following a fall by 0.5% M/M previously. The ECB holds its forum in Sintra on investment and growth. The subject contains lots of interesting items that touch monetary policy, but policy itself is not the subject. Therefore, we may see few comments that directly impact markets.
German, Italy and US tap market this week
This week's EMU bond supply comes from Germany and Italy. They both start tomorrow, respectively with a 2-yr Schatz auction (€4B 0% Jun2019) and zero-coupon & inflation-linked bonds. The Italian treasury returns on Friday with a regular BTP auction.
The bonds and amount on offer still needs to be announced. The US Treasury starts its end-of-month refinancing operation today with a $26B 2-yr Note auction. Currently, the WI trades around 1.36%. The Treasury continues tomorrow with a $34B 5-yr Note auction and ends on Wednesday with a $28B 7-yr Note auction.
Slow start ahead of Yellen speech and inflation figures?
Overnight, Asian stock markets copy WS's modest gains with China outperforming. The US Note future trades stable, while Brent crude tries to rebound away from the lows. We expect a neutral opening for the Bund. Italian BTP's could underperform following the Italian state's rescue of 2 regional lenders. The bill could mount up to €17B, consisting of €5B up-front and €12B guarantees. Additionally, the centre-right's gains in municipal elections could further tangle up the political landscape.
Today's eco calendar contains German IFO business sentiment (downside risks) and US durable goods orders (neutral). Both are no strong market movers suggesting limited intraday impact. Markets will focus on Yellen's speech (tomorrow) and German/US inflation readings (both on Friday). The impact from this week's US supply operation (normally negative US Treasuries) could be balance by technical end-of-month and end-of-quarter buying. We start the week with a neutral bias.
Technically, we closely monitor the German 2-yr yield which tested important resistance (-0.63%/-0.60%) as global central bank talk recently proved that the peak of dovishness is behind us. US yields are above (5yr), near (10y) and below (30y) key support levels even as the Fed held on to the blueprint of its future tightening cycle last week. If support levels in US yield terms hold, we recommend a cautious sell-on-upticks strategy. Our basis assumption remains that the long term rally of core bonds is over as policy normalisation slowly starts (ECB) or accelerates (Fed). A declining oil price is, via declining inflation expectations, a risk to our view.
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