New records for S&P and Dow, but little harm to bonds
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The downtrend on global core bonds markets simply continued during yesterday's European trading session as risk sentiment thrived. However, the German 10-yr yield failed to clear the 0.5% resistance level for a second straight session, putting an intraday bottom for the Bund. Strong US eco data, disappointing EMU consumer confidence and this technical issue contributed to the underperformance of US Treasuries vs German Bunds. The US Note future slightly bounced back in the US session as well even if US stocks (S&P 500 and Dow) surged to new all-time highs. The US yield curve flattened with yield changes ranging between +1.3 bps (2-yr) and -1.4 bps (30-yr). The front end of the curve remains supported by next week's FOMC meeting and the recent repricing of 2018 Fed rate hikes (2 instead of 1; market implied probability >75%). German yields declined by 0.3 bps (2-yr) to 1.6 bps (10-yr) on a daily basis. 10-yr yield spread changes vs Germany were minor with Italy underperforming (+5 bps).
Asian stock markets cruise on yesterday's positive risk sentiment in Europe and the US and generally gain over 1%. The US Note future and JPY lose ground suggesting positive risk sentiment will last in the European open and could weigh on the German Bund.
Today's eco calendar is empty apart from EMU September PMI's. Consensus expects a stabilization around August levels for both the manufacturing (54.5) and services (54.4) gauges. We expect a near consensus outcome. In the current positive risk environment, it could weigh further on core bonds so we hold our intraday downward bias for the US Note future and the German Bund.
Tuesday's technical breaks in US yields suggest a test of the cycle highs in the run-up to next week's FOMC meeting. US yields started a nice upleg after September payrolls showed wage growth accelerating at its fastest pace this expansion. Other US eco data point to a continuation of current strong growth with more and more signs of additional inflationary pressures. This caused a repositioning higher in US yields, anticipating a longer US Fed tightening cycle, our long favoured scenario. The German 10-yr yield followed the US 10-yr yield higher and is testing the 0.5% upper bound of the 0.3%-0.5% sideways range. ECB's veiled upbeat comments on EMU inflation and the relief rally in Italian BTP's play an additional role.
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