Cautious bias given huge event risk

KBC Market Research Desk KBC Bank

Stellar US payrolls marked the end of last week's volatile trading. The US economy added 266k jobs in November, overshooting 180k consensus, with the previous 2 months' numbers being upwardly revised by 41k. The unemployment rate matched multidecade lows (3.5%). Core bonds sold off on the report with US Treasuries obviously underperforming German Bunds. We believe that losses remained contained given strong payrolls and adding positive risk sentiment (US bourses +1%) and higher oil prices (deeper production cuts by Saudi Arabia on OPEC meeting). US yields added 1.8 bps (30-yr- to 3 bps (5-yr) across the curve. The German yield curve steepened with daily changes varying between -0.2 bps (2-yr) and +1.4 bps (30-yr). 10-yr yield spread changes vs Germany ended close to zero with Greece (-4 bps) and Italy (-3 bps) outperforming.

Asian stock markets trade mixed overnight with China underperforming. Chinese November trade data showed a continuing decline in total exports while the FT reports that the Chinese government instructed state offices and public institutions to remove foreign computer gear and software within three years. Core bonds trade with a small upward bias.

Today's eco calendar isn't really enticing apart from tonight's $38bn 3-yr Note auction in the US. Event risk looms large this week though, suggesting investors might start with a cautious (ie positive) bias for core bonds. The Fed meets on Wednesday and is expected to stay put following three rate cuts earlier this year. The fresh dot plot probably indicates the central bank's preference to stay on hold in the 2020 election year, awaiting more signs of the economy gathering fresh momentum. The ECB is up next on Thursday with President Lagarde's inaugural meeting. The ECB will stay on hold as well, but we are eager to find out which accents Lagarde will stress. The UK general election, with PM Johnson's Conservative party leading comfortably, also takes place on Thursday and could influence the Bund and US Note future through the UK Gilt Market. From a data point of view, we have US retail sales on Friday with consensus forecasting another decent figure (0.4% M/M). The icing on the cake is Sunday's US-imposed deadline to add import tariffs on Chinese goods. US and Chinese negotiators seem to be in the final inning for a phase one trade deal. Will they be able to deliver this week and avoid additional charges? The possible start of House Impeachment votes serves as a wildcard.

Technically, the German 10-yr yield broke above -0.41% resistance as geopolitical uncertainty diminished, improving the technical picture. Targets of this double bottom formation are -0.25% and -0.13%. The 38% retracement level of the Oct-Aug decline stands at -0.24%. The US 10-yr yield trades in the upper half of the 1.43%-1.94% sideways trading channel. First tests to take out 1.94% failed. First support kicks in around 1.7%.

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KBC Market Research Desk

KBC Bank

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