US non-manufacturing ISM kicks off eco/event calendar
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Global core bonds gained ground yesterday. Correlations between markets was loose. News that the US and China are entering the final stages lifted bourses in Asia, but the move lost momentum in Europe and the US. The eco/event calendar was empty. German yields lost 0.1 bp (2-yr) to 2.6 bps (10-yr). The US yield curve bull flattened with yields grinding 1.3 bps (2-yr) to 3.3 bps (30-yr) lower. 10-yr yield spread changes vs Germany ended unchanged with Italy (+3 bps) and Greece (+5 bps) underperforming. Greece announced a new 10-yr syndicated deal (likely today), which will be the first bond sale with a 10-yr maturity since March 2010!
Most Asian stock markets trade flat to weaker this morning following minor losses on WS yesterday (Dow -0.8% underperforming). China lowered its growth target for 2019 to 6%-6.5% from “around 6.5% last year while announcing some fiscal stimulus as well. The Chinese Caixin services PMI disappointed (51.1 from 53.6 vs 53.5 expected). The German Bund and US Note future are going nowhere.
Today’s eco calendar contains final EMU services PMI’s and the US non-manufacturing ISM. We especially eye the latter. Consensus expects a slight uptick in February from 56.7 to 57.4. We side with consensus even if the (more externally-oriented) manufacturing gauge fell from 56.6 to 54.2. Such outcome could weigh on US Treasuries with underperformance against the German Bund. Boston Fed Rosengren, who votes this year, speaks on the current economic outlook. Early January, he said that his own economic outlook was brighter than the one painted by financial-market movements. He nevertheless advocated patience to see how things evolved. Developments suggest that he’ll stick to his more optimistic view on the economy which can result in hawkishly perceived headlines. The market reaction might be muted/non-existing given that Rosengren represent a minority voice on the board. European investors might be side-lined ahead of Thursday’s ECB meeting. Minor downward revision to the central bank’s eco outlook probably won’t trigger changes to the ECB’s forward guidance. The ECB intends to keep policy rates unchanged at least through the Summer, with some betting on an extension of this period beyond 2019. Rate markets only discount a first hike by the end of 2020. We do think that the ECB will announced work-in-progress on new TLTRO’s by June. Such message should be sufficient to prevent a near term return to February lows in German yields. Technically, the US 10-yr yield is moving higher in a 2.49%-2.78% sideways trading range. The German 10-yr yield regained 0.15% support, paving the way for a further rise towards 0.27%.
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