Busy US calendar to dominate markets

Rates

Resistance and oil price halts rise US Treasuries

Global core bonds eked out some gains yesterday, but technical resistance and higher oil prices capped their up-leg. Equities managed to keep their composure. Core bonds opened strong as risk aversion ruled Asian trading and as some investors started doubting the reflation trade after Trump's press conference. However, the risk-off sentiment didn't really came to fruition. The US Note future ran into 125-09 resistance, which halted its up-leg. The US TNote future once more tested the resistance in the afternoon, when US equities fell after the US opening. This attempt failed as well, as equities returned higher. Oil prices increased throughout the day which played also against core bonds. Core bond selling kicked in as an average 30-yr US bond auction was considered not good enough. In a daily perspective, US yields fell up to 1.8 bps, the belly of the curve outperforming. The 30-yr yield rose 0.4 bps. Changes on the German yield curve varied between -1.3 bps (10-yr) and +1.1 (30-yr) bp,. On intra-EMU bond markets, 10-yr yield spread changes versus Germany ranged between -2 bps and +1 bp with Portugal outperforming (-5 bps).

Fed governors Harker, Evans and Lockhart hit the wires and confirmed earlier comments. Harker and Evans are voting members this year and support 3 rate hikes. Importantly, Harker added that fiscal policies haven't been factored into his forecasts, suggesting that he might get a hawkish bias throughout the year.

Busy US calendar to dominate markets

The December US retail sales are expected to have risen by 0.7% M/M, following a modest 0.1% M/M rise in November. It would be the strongest monthly rise since a similar increase in June 2016, which would bring the Y/Y increase to about 4%. The strength will be broad-based. Unit car sales were very strong and both gasoline prices and volumes should have gone up.
However, also excluding these two volatile items, retail sales should have grown fast. PPI (producer prices) are expected to have gone up by 0.3% M/M and 1.6% Y/Y in December following a 0.4% M/M and 1.3% Y/Y rise in November. Core PPI is expected to have increased only 0.1% M/M and 1.5% Y/Y after a 0.4% M/M and 1.6% Y/Y increase. We think however that risks are on the upside. Finally, the preliminary Michigan consumer sentiment is expected to be up slightly to 98.5 from 98.2 in December. Following steep increases in the previous months the index is at its highest level since January 2004. So, we expect a batch of very strong US data to start 2017.

Strong US eco data should avoid break above 125-09

Overnight, Asian stock markets trade mixed with China underperforming after disappointing trade data. The US Note future and Brent crude also suggest a neutral opening for the Bund.

Today's eco calendar heats up in the US with retail sales, PPI data and Michigan consumer confidence. Risks are on the upside of expectations which is negative for US Treasuries. In the aftermath of Trump's press conference, some investors started doubting the shelf life of the reflation trade. The US Note future tested 125-09 resistance a third time, but a break didn't occur. If this resistance holds after today, we think that the US Note future could be in for some sideways trading in the near term between 122-14+ and 125-09. General risk sentiment is today's other possible trading factor.

Longer term, we expect US markets to further align with the Fed's scenario of 3 rate hikes this year. In EMU, the German Bund bounced into 164.9 resistance at the start of the year and fell prey to profit taking on higher German inflation data. As the underlying economic picture in EMU improves further, we also expect more downside in the Bund despite the ECB's bond buying programme.

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