Sentiment-driven trading at start of the week?
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Lacklustre start to trading week
Global core bonds traded lacklustre during the European session, ignoring both a strong PMI business survey and stronger equities, but came alive once the US session got going. US Treasuries and German bonds faced selling pressure because of several reasons. First, US traders prepared for the Treasury’s end-of-month refinancing operation (which starts today) and corporate supply. Second, the usually ignored US ISM surprisingly jumped to the highest level of the year (53.2). Third, US equities traded strong. Thin trading conditions may have exacerbated the move. Once European traders closed the books, equities and US Treasuries/the Bund stabilized. The oil price spiked lower, but recovered. In a daily perspective, the German yield curve bear steepened with yields 0.7 bps (2-yr) to 3.1 bps (30-yr) higher. The US yield curve shifted in similar fashion with yields 1.6 bps (2-yr) to 3.2 bps (30-yr) higher. On intra-EMU bond markets, Portugal (-6 bps) and Spain (-3 bps) outperformed. Portuguese bonds profited from DBRS’s decision to keep the BBB- rating unchanged, while Spanish bonds advanced as the political stalemate could end as the Socialists’ party will no longer veto a Rajoy-led minority government.
Eco calendar modestly interesting
In the euro area, French business confidence (102) is expected to have stabilized in October, just like the German IFO business sentiment (109.6). Coming after the PMI reports of these countries yesterday, market attention should be less outspoken. The October German PMI was very strong following a decline in September, but the IFO jumped sharply in September. This suggests that the PMI played catching up with the IFO and is probably not the precursor of another substantial move higher of the IFO in October. However, recent better data from the industrial side suggest that an upward surprise is possible. The French manufacturing PMI did well in October, while services PMI disappointed, but following a good September reading. This suggests risks for an upward surprise in French manufacturing sentiment for October. Mario Draghi speaks in Berlin on stability, equity and monetary policy. An interesting theme, but it is unlikely he will give strong hints on policy a few days after the ECB meeting. In the US, consumer confidence is expected to have dropped to 101 from 104.1 in October, a post crisis high. There is no particular reason to expect a decline except that it often falls in October, it is at a high and elections are looming. So, a decline looks indeed more likely. Nevertheless, it is an upward surprise that would get attention and weigh on core bonds. The Richmond Fed manufacturing index is expected to improve from -8 in September to -4 in October.
Finland, Austria and US supply market
The Finnish Treasury sells up to €1B 15-yr bonds (0.75% Apr2031). The bond traded stable in ASW-spread terms going into the auction, but is the cheapest bond on the Finnish curve, supporting demand from a relative point of view. Austria mandated bank to manage a new 7-yr syndication (Jul2023) in the near term, likely today, and also explored the possibility of a 70-yr (!) tranche. The US Treasury starts its end-of-month refinancing operation with $26B 2-yr Note auction. Currently, the WI trades around 0.85%.
Sentiment-driven trading at start of the week?
Overnight, Asian risk sentiment is mixed. The US Note future and Brent crude trade stable, suggesting a neutral opening for the Bund.
Today’s eco calendar contains German IFO, US consumer confidence and US Richmond Fed manufacturing index. We see risks on the upside of expectations, which could especially affect US Treasuries. Upcoming supply is negative as well for Treasuries. Yesterday, the market implied probability of December rate hike increased above 70% for the first time in the close. In the run-up to next week’s FOMC meeting, the US Note future could test 129-26 support again, anticipating hints on a December move. In such scenario, the US 10-yr and 30-yr yields should be able to hold above key resistance levels at 1.75% and 2.5% though. ECB’s Draghi’s speech in Berlin is a wildcard today, but we expect him to keep close to last week’s comments at the press conference. Earnings (Caterpillar, GM, Apple) could influence core bond markets via risk sentiment.
We think that the correction higher in the Bund following the ECB meeting has run its course. ECB president Draghi said that the ECB will deliver key policy guidance in December. QE won’t last forever, but also won’t stop immediately after March 2017, suggesting that the central bank has a tapering scenario in mind, but not necessarily just after March. We expect the Bund to remain in the sideways trading range (163 area – 165.63).
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