US Treasuries gain on weak manufacturing ISM
|US Treasuries outperformed German Bunds yesterday. Both initially enjoyed support from a rally in UK Gilts. An increased probability of snap elections in the UK generated the safe haven flows. The Bund topped off after a test of the record high (-0.73% low for the German 10-yr yield) and returned towards opening levels. US Treasuries received an additional push in the back from a weak August Manufacturing ISM which dropped below the 50 boom/bust mark for the first time since February 2016. US yields fell by 5.7 bps (5-yr) to 1.1 bp (30-yr) in a daily perspective. The German yield curve flattened with yield changes ranging between +1.5 bps (2-yr) and -2.9 bps (30-yr). 10-yr yield spreads changes vs Germany were very small with Italy (-9 bps) outperforming as more progress was made for setting up the PD-5SM coalition led by PM Conte. 5SM members eventually ratified the proposal in an online poll. Conte will today report back to President Mattarella. At current levels, we believe that quite some positive Italian news is already discounted in BTP's.
Most Asian stock markets record gains this morning despite weakness on WS (-1%) yesterday. The Chinese Caixin services PMI (52.1 from 51.6) rose more than expected in August. Developments in the UK (see below) also benefit risk sentiment. Core bonds trade a tad softer. Two voting Fed members reiterated their, opposite, calls for the September FOMC meeting. Boston Fed Rosengren thinks that there is no need for immediate action while St. Louis Fed Bullard prefers to proceed with a 50 bps rate cut.
Today's eco calendar contains final EMU services PMI's and EMU retail sales. They won't impact trading. An avalanche of Fed and ECB members is scheduled to speak. Some Fed governors recently argued against cutting policy rates further, but we think they're still a minority. ECB members seem to rule out additional asset purchases in September. Cutting deposit rates further (in a tiered system) seems to be the more likely option. The Fed's Beige Book, preparatory document for the September meeting will be interesting after yesterday's weak ISM. Will Fed districts give more details about a US slowdown? US Treasuries have more room to outperform German Bunds.
We hold our view that one of two things is necessary to end the upleg in core bonds: a sustained improvement in eco data and/or clarity on future EMU/US monetary policy. September ECB (12) and Fed (18) meetings will probably lock/shape policy for several months ahead. Markets expect (at least) rate cuts from both. The German 10-yr yield last & this week tested the all-time low (- 0.73%). A return above first minor resistance (-0.61%) is necessary to call off the downside alert. Similar resistance for the US 10-yr yield kicks in around 1.6%. On the downside, key levels are 1.44% (2019 low) and 1.32% (all-time low).
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