US eco data highlights in thin calendar
|FOMC: no real surprises, but markets react anyway
Global core bonds took a breather yesterday ahead of the FOMC decision and following Tuesday's sell-off. The FOMC statement changed the picture though. US Treasuries gained ground following the publication and the dollar was heavily sold while we didn't see much new info in the FOMC statement. Ultimately, US Treasuries erased Tuesday's losses. From a bond perspective, we think that the market positioned itself for a more hawkish outcome after which repositioning occurred. If so, there shouldn't be more follow through buying today. In a daily perspective, US yields fell between 2.6 bps (30-yr) and 6.3 bps (5-10yr), the belly marginally outperforming the wings. Changes on the German yield curve were small, but the market closed ahead of the FOMC press release. On intra-EMU bond markets, 10-yr yield spread changes versus Germany varied between -2 bps (Italy) and +2 bps (Greece).
The FOMC held its policy settings unchanged, but suggested that it may start tapering its balance sheet "relatively soon". This probably means a September announcement and an October implementation, unless the debt ceiling stand-off isn't resolved. Furthermore, the FOMC marginally tweaked its inflation description: "below 2%" instead of "somewhat below 2%" previously. It literally repeated its forward guidance: they expect inflation to go to 2% following a period of inflation somewhat below 2% and want to continue gradual tightening. There were no dissents. We think the FOMC didn't want to disturb markets and needs more time to assess the situation before continuing its gradual tightening. Tapering in September is a weak form of tightening which gives them more time to decide on a rate hike. In December, they'll know more about the developments in the labour market and the inflation and if that confirms their expectations, the third rate hike of the year may be announced, fulfilling the rate projections from December 2016. (see Flash for full review)
US eco data highlights in thin calendar
Beside the EMU M3 money supply figures that are expected stable, US eco data will "dominate". Durable goods are expected to have rebounded by 3.5% M/M in June following a 0.8% M/M decline in April. However, the monthly variation is largely a transportation (Boeing) phenomenon. Excluding transportation, orders are expected to be up 0.4% after a 0.3% M/M increase in June. Also capital goods orders and shipments are expected to have grown (0.3% M/M). Orders are difficult to forecast, but should core orders rise as expected or slightly more, it would suggest a re-acceleration of investment. Initial Claims fell quite sharply last week to 233K. Some increase is expected this week (240K). Claims are often more volatile in July. Finally, the trade deficit (goods) is expected to have narrowed slightly in June ($65.5B).
More strong US auctions
The US Treasury continued its refinancing operation yesterday with strong $15B 2-yr FRN and $34B 5-yr Note auctions. The 5-yr auction stopped firmly through the 1:00 PM bid side with a strong bid cover (2.58). Bidding details especially showed another strong indirect bid. The Treasury ends its refinancing operation today with a $28B 7-yr Note auction. The WI currently trades around 2.1%.
Very important session: follow-through or not?
Most Asian stock markets trade positive despite dollar weakness. Strong earnings by Facebook and Samsung boosted risk sentiment. The US Note future doesn't extend yesterday's gains and trades stable. We expect the Bund to open near levels reached in after trading.
Today's eco calendar is unlikely to move markets, but it will be a very important trading session. The US Note future gained ground yesterday on the subtlest of changes in the FOMC statement even if it keeps the Fed on track to announce the start of a BS run-off in September and to hike rates in December. If the US Note future can't build on yesterday's momentum, it suggests that there's little wiliness to attack the topside unless US eco data deteriorate throughout the month. Failure to gain ground today/tomorrow would comfort our sell-on-upticks strategy going into key Fed & ECB meetings in September. The tough US legislative process (eg recall/repeal Obamacare) seems to be discounted in markets. Technical items like the end of the US refinancing operation or end-of-month extension buying could distort the trading pattern.
Technically, the German 10-yr yield retested previous resistance (0.5%), but a break didn't occur. This suggests that we might attack the 2017 high (0.619%). Next major events from the EMU side are Draghi's speech in Jackson Hole and the September ECB meeting. Speculation on winding down QE is negative for Bunds in the run-up to the event.
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