ST positive core bonds but Trump won’t derail Fed
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Trump shocks markets
Global core bonds traded sideways yesterday amid an empty eco calendar until comments by US President Trump shocked US markets in the final trading hour. Trump said that he would prefer the Fed to keep interest rates low, suggesting that he will appoint dovish profiles for the vacant seats of vice chairman and board members. He let open the possibility of reappointing Fed chairwoman Yellen for a second term. Trump also thinks the dollar is getting too strong. After his comments, US Treasuries shot higher with yields penetrating through key support level (US 5-yr yield < 1.8%; US 10-yr yield < 2.3%).
At the end of the day, the US yield curve declined by 3.2 bps (2-yr) to 6.3 bps (5- yr). The German yield curve flattened with yield changes ranges between +0.8 bps (2-yr) and -2.1 bps (30-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany ranged between -5 bps (Greece) and +3 bps (Spain/Italy)
Consumer sentiment and earnings in focus
Today's eco calendar contains only the US April Michigan consumer sentiment, the March PPI and the initial claims. Michigan consumer sentiment reached its highest level since December 2000 in February at 98.2 and eased in March slightly to 96.9. For April a further modest decline to 96.5 is expected. We see risks for a slightly further fall than consensus, even as arguments are balanced. The failure of the healthcare reform may have diminished expectations of tax cuts, but some less wealthy households might have more confidence as their coverage is safe for now. Also slightly weaker equity sentiment may weigh, even, as this might have been counterbalanced by an ongoing strong labour market. Producer prices are expected to have been flat in March (up 2.4% Y/Y from 2.2% Y/Y previously). Core PPI is expected to have gone up by 0.2% M/M and 1.8% Y/Y (versus 1.5% Y/Y in February). So benign PPI's as most inflation indicators also in other countries have shown in March. Finally, following a drop to 234K last week, claims are expected at 245K now. All in all, the eco data may be benevolent for markets.
ST positive core bonds but Trump won't derail Fed
Overnight, US Treasuries continue to trade with an upward bias while the dollar remains in the defensive following's Trump's comments on the Fed and the US currency. Asian stocks markets trade mixed with Japan underperforming (USD/JPY <109). We expect a stronger opening for the Bund with the German 10-yr yield below 0.2% support.
Trump's remarks hit the markets in the final trading hour which could have exaggerated the market reaction. The US 5- and 10-yr yield dropped below key levels, harming the technical picture in yield terms and boosting ST sentiment for US Treasuries. Medium to longer term, we don't think that the Fed will change its policy normalization strategy even if Trump can appoint three new Fed-governors. Therefore, we wait for signals that the short-term bullish core bonds momentum loses steam before selling into the uptick.
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