Core bond yields lured by first resistance levels

Rates

Core bonds ended last week's trading session in quiet fashion after two days of volatility, especially in US Treasuries. Wednesday's gains on a dovish Fed Powell testimony and likewise FOMC Minutes were completely erased on Thursday on higher-than-expected US CPI inflation numbers, a weak 30-yr Bond auction and hawkish leaning comments from non-voting Fed governors Barkin & Bostic. The latter remain in the minority though with voting members Brainard, Williams and Evans on Friday dotting the i's and defending at least one rate cut from a risk-management perspective. US stock markets marched on with the three major indices closing at new all-time highs. Brent crude prices weren't affected by tropical storm Barry causing havoc in the Gulf coast. US yields shed 1.2 bps (30-yr) to 2.1 bps (5-yr) in a daily perspective. The German yield curve bear steepened with yields rising 0.2 bps (2-yr) to 1.7 bps (30-yr). 10-yr yield spread changes vs. Germany widened by up to 8 bps (Spain/Greece).

Most Asian stock markets eke out (minor) gains this morning. China outperforms on a batch of solid eco data (industrial production, retail sales, investments) while Korea underperforms. Japanese markets are closed. Core bonds lose minor ground.

Today's eco calendar contains the US Empire Manufacturing July business sentiment. Consensus expects a rebound from -8.6 to 2 after the extremely steep drop in June (17.8 to -8.6). This regional gauge isn't expected to influence market thinking on near term Fed policy. A 25 bps July rate cut is fully discounted. Refraining from easing in July or a bigger than expected rate cut (50 bps) are the current tail risks. NY Fed governor Williams speaks, but he already said last week that conditions and arguments for adding policy accommodation have strengthened over time. Q2 earnings season starts with Citigroup today and serves as a wildcard. We continue to argue in favour of consolidation/correction higher in German/US yields in the near term with main eco data printed, ECB/Fed action priced in and Summer trading conditions kicking in. The German 10-yr yield last week's bounced higher after reaching a new all-time low around the ECB's deposit rate. First resistance appears around -0.03%/-0.13%. The US 10-yr yield managed to hold north of 2% after an intense test end of June/early July. First, small, resistance lures around 2.17%, with 2.33% being the more high profile test.

Download The Full Sunrise Market Commentary