FOMC gains partly erased; Nowotny hits Bund

Rates 

Global core bonds lost ground yesterday, reversing part of Wednesday evening's post‐FOMC gains. Bunds underperformed US Treasuries, as the failure of the far‐right Dutch candidate Wilders to win the elections weighted extra on the Bund, as well as late session comments of ECB Nowotny. He said the ECB exit may be different from the Fed with the deposit rate hike possibly preceding asset tapering. Not all rates should be increased simultaneously, he added. ECB executive member Praet already contradicted Nowotny, saying that the sequence of the exit is well defined in the forward guidance. Nowotny pushed the Bund 40/50 ticks lower in after‐trade. Praet's response was ignored. In a daily perspective, the German yield curve trades 3 bps (2‐yr) to 3.4 bps (10‐yr) higher. The US yield curve bear steepens with yields 3.3 bps (2‐yr) to 4.7 bps (10‐yr) higher. On intra‐EMU bond markets, 10‐yr yield spread changes versus Germany widened up to 3 bps with Portugal underperforming (+27 bps), perhaps in the run‐up to tomorrow's rating decision by S&P (BB+, stable outlook).

 

US production and consumer sentiment in focus

The EMU calendar contains only second tier reports which won't affect markets. The US production and Michigan consumer sentiment data have some, albeit modest, market moving potential. US industrial production is expected to have rebounded in February (0.2% M/M) following a weather‐related 0.3% M/M drop in January. Also this month, manufacturing output (0.5% M/M) is expected to outperform overall production, as utility output again lagged. Mining should be a positive as the number of active drilling rigs continued to recover. We have no reasons to distance ourselves from consensus. Michigan consumer sentiment is expected to have increased slightly in March to 97 from 96.3. Strong labour market, strong equities and lower gasoline prices are favourable for sentiment to improve with strong risks on the upside of consensus. Our expectation is underpinned by some outperformance of the Bloomberg and Conference board measures of confidence.

 

Consolidation ahead of the weekend?

Overnight, most Asian stock markets trade positive with China and Japan underperforming. The Bund lost ground after European trading and is expected to open lower. Comments by ECB Nowotny, who said that the ECB doesn't necessarily have to follow the Fed's example when normalizing policy, inflicted some damage. However, we don't expect the comments to harm Bunds all day long. The US Note future trades marginally higher.

Today's eco calendar only contains US industrial production and Michigan consumer confidence, but we don't expect them to impact trading much. Consolidation ahead of the weekend is likely. Technically, US yields failed to break key resistance levels in the run‐up to the Fed‐meeting and suffered a significant setback afterwards. We expect the US 10‐yr yield to trade in the 2.3%‐2.64% range, perhaps even until after the French elections. In the near‐term, the US Note future probably has more upward potential. Longer term, we keep our scenario of 4 rate hikes in 2017 unchanged.

Last week's ECB meeting and Bund sell‐off comforted our call that another "calibration" of the ECB's QE programme will happen in H2 2017. Therefore, we have a long term bearish view on Bunds as well. Technically, the German 10‐yr yield moved at a rapid pace from the 0.2% lower bound of the sideways range towards the 0.5% upper bound, but a break didn't occur. Like in the US, we expect range trading ahead of the French elections.

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