EMU PMI’s won’t turn the tide, even in case of strength
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Global core bonds ended mixed yesterday. The German Bund started with a catch-up move after US Treasuries' impressive gains on Wednesday night. These occurred after the Fed in a dovish surprise put all 2019 rate hikes off the table while ending the balance sheet run-off already by September. Markets took the scenario into stride where the monetary cycle already peaked despite the "symbolic" rate hike in 2020 suggested by the new dot plot. The US Note future fell prey to some profit taking as the US 10-yr yield hit the key 2.5% support area. The failed test in combination with a US equity market rebound caused some return action lower in the US Note future and explains the intraday underperformance vs the German Bund. Mixed US eco data proved to be irrelevant. The German yield curve bull flattened with yields 1.9 bps (2-yr) to 5.7 bps (30-yr) lower. Changes on the US yield curve varied between -0.5 bps (30-yr) and +1.3 bps (5-yr). 10-yr yield spread changes vs Germany narrowed up to 3 bps (Italy).
Asian stock markets are mixed overnight. Core bonds have a tentative upward bias. The EU and UK pushed the brexit deadline from March 29 to April 12 (see below), adding to general uncertainty. Japanese eco data disappointed. The Japanese 10-yr yield reached the lowest level since the end of 2016 (-0.07%), with investors returning from a one day holiday.
Today's eco calendar contains March EMU PMI's. Consensus expects a stabilization of the composite measure (52 from 51.6) with the manufacturing gauge still forecast in contraction territory (49.5). We see risks on the upside of expectations. After the dovish messages from both the ECB and the Fed, we think that market reactions to economic data will in first instance be asymmetric with core bonds gaining ground on disappointments, but trading lacklustre in case of beats. Core bond momentum is positive and we don't fight that trend. Both the ECB and Fed created fertile breeding ground for additional bond gains over the medium term, flattening the curve. The US 10-yr yield made a first test of the lower band of the 2.5%-2.79% trading rage. The German 10-yr yield can return to zero and even negative levels unless growth/activity data start picking up at a rapid pace.
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