Hints of tiering in ECB Minutes?
|Global core bonds lost ground yesterday. The main move occurred overnight after the FT ran an article on US-Sino trade talks. Both parties supposedly resolved most of the issues in their trade dispute apart from the implementation and enforcement of the deal. High-levels talks are currently held in Washington. Eco data printed mixed without directly impacting trading. For once, good news came from Europe with upward revisions to March services PMI's. US ADP employment and non-manufacturing ISM both fell short of forecasts. The latter fell to the lowest level since 2017, with key subcomponents declining as well. The ISM remains at an elevated absolute level for now, north of 56. US stock markets closed in positive territory, but failed to cling to initial momentum. The German and US yield curves both bear steepened. German yields increased by 2.9 bps (2-yr) to 7.2 bps (30-yr). US yields added between 3.4 bps (2-yr) and 5.6 bps (30-yr). Peripheral yield spreads vs Germany narrowed by 3-4 bps with Greece (-9 bps) outperforming.
Asian stock markets are mixed overnight while core bonds tread water. The UK House of Commons narrowly passed a bill to block a no-deal Brexit (see below). Avoiding a crash out of the EU after April 12 was by and large discounted. We expect a neutral start to European trading.
Today's eco calendar is thin with only second tier figures like US weekly jobless claims. The release of the Minutes of the ECB's March policy meeting could be interesting. ECB Draghi highlighted afterwards the split between governors willing to get rid of negative interest rates and the ones willing to extend the unchanged policy guidance beyond the current end of 2019. Talk about "ECB tiering", splitting up the deposit rate to allow some deposits at zero or positive rates, intensified since that meeting. A decision is unlikely at next week's ECB gathering, but expect the debate to really come alive in June or September. In first instance, this could be considered a rate hike, but it simultaneously raises the bar to engage to a full normalisation later on.
Markets concluded that the ECB missed out on this cycle. The 3M Euribor stripcurve only returns to positive levels by mid-2022. Regarding Fed policy, they now discount a 64% probability of a Fed rate cut by December. The US 10- yr yield fell through the lower bound of the 2.5%-2.79% trading range, continuing the downward trend since the beginning of March. The previous support now serves as resistance which is tested. On the downside, next support levels are the 2.3% area (intermediate) and 2% zone (key). The German 10-yr fell to negative levels again, the first time since October 2016. The downtrend remains in place with the all-time low (-0.2%) in sight.
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