Calendar remains thin, but plenty central bankers

Still fairly quiet, sideways trading

Global core bonds parted ways yesterday with US Treasuries (slightly higher) outperforming German Bunds (flat). Trump's administration made specific proposals to weaken NAFTA while two voting FOMC governors (Chicago Fed Evans and Dallas Fed Kaplan) sounded dovish on inflation, questioning a December rate hike. The Bund initially lost some ground as Spanish assets opened strong following Catalan President Puidgemont's speech, but the move never went far. PM Rajoy issued a formal request to the Catalan government in Barcelona for confirmation of whether it has declared independence, amid "confusion created deliberately." A confirmation from Catalanya could cause Madrid to trigger article 155, stripping the region from its autonomy. During the US session, neither the strong 3- and 10-yr US auctions nor the FOMC Minutes were able to give further US Treasuries direction.

In a daily perspective, the German yield curve bear steepened with yields 0.6 bps (2-yr) to 2.7 bps (30-yr) higher, largely due to a weaker opening, catching up with Tuesday's eve after cash market trading. The US yield curve flattened with yields 0.6 bps (2-yr) higher to 1.2 bps (30-yr) lower. On intra-EMU bond markets,10-yr yield spread changes versus Germany narrowed up to 8 bps (Spain/Portugal; the latter profiting from successful auction), while Italy underperformed (-2 bps). Upcoming supply weighted on Italy, as was the commotion about the new electoral law.

Calendar remains thin, but plenty central bankers

EMU industrial production is expected to have grown strongly in August (0.6% M/M & 2.6% Y/Y), following a weak 0.1%% M/M in July. Production is outdated and has little market moving potential. Given the strength of the German and Italian production, risk are on the upside of consensus (even as French production disappointed). US initial claims are expected to unwind further (250K) the hurricane-related pop-up in early September, but consensus might have underestimated the rise in Puerto Rican claims (hurricane effect), which surprisingly weren't visible last week. US producer prices (PPI) are expected to have increased by 0.4% M/M and 2.6% Y/Y in September, following a more modest 0.2% and 2.4% Y/Y in August. Core PPI inflation is expected unchanged at 2% Y/Y. The headline jump might have been due to temporary disruptions after the hurricanes passed. Markets are sensitive to all inflation readings, but price action may be less outspoken as the more important CPI inflation will be released tomorrow and figures may be distorted by the hurricane effects. There are lots of central bank speakers at the bi-annual IMF/Worldbank meetings. Especially Draghi, Praet and Brainard are worth listening too.

Italy and the US end this week's scheduled supply

The Italian debt agency issues a new 3-yr BTP (€3.5-4B 0.2% Oct2020) and taps the on the run 7-yr BTP (€1.5-2B 1.45% Nov2024) and 30-yr BTP (€1-1.5B 3.45% Mar2048). Grey trading suggests that the new 3-yr BTP will be priced with a 3.8 bps pick-up in ASW spread terms compared with the previous 3-yr benchmark (0.35% Jun2020). That corresponds with a 8 bps pick-up in yield terms. Other bonds on offer cheapened slightly in ASW spread terms going into the auction. We expect the auctions to go well.

The US Treasury started its mid-month refinancing operation yesterday with strong $24B 3-yr Note and $20B 10-yr Note auctions. The 3-yr Note auction stopped a hair through the WI bid and the bid cover rose to 2.83 from 2.7 previously. Buy-side demand was about average overall, but the indirect bid stood out. The 10-yr Note auction also stopped a little through the 1:00 PM bid side with the best bid cover since June (2.54). The direct bid was just below average, but the indirect bid was the largest in more than a year. The Treasury ends its refinancing operation with a $12B 30-yr Bond auction. The WI currently trades around 2.87%.

Consolidation phase to continue

Most Asian stock markets trade positive overnight. The US Note future has an upward bias though while the dollar loses some ground. If any, we expect a slightly stronger opening for the Bund.

The eco calendar remains rather dull today. The Spanish matter remains a factor of uncertainty. Spanish PM Rajoy gave Catalonia an 8-day deadline to drop their independence bid at the cost of evoking article 155 and stripping the region from its autonomy. JP Morgan and Citigroup are the first big companies to report Q3 earnings and can influence intraday sentiment via stock markets. Central bank speakers are wildcards

Technically, US yields ran into resistance after Friday's payrolls, initiating some short term consolidation. A December rate hike is now almost completely discounted and also suggests that the sell-off is ripe for a pause. Adding the geopolitical context and US/German stock markets at record levels (ready for some profit taking?) even suggest a small positive bias for core bonds in this back-loaded (key US eco data on Friday) week. Looking past this week, we hold a sell-on-upticks strategy both in the US Note future (entry around 126) and the Bund (entry levels around 162).

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