Earnings season to impact global trading?

KBC Market Research Desk KBC Bank

Global core bonds declined yesterday with US Treasuries underperforming German Bunds. The real downleg occurred around the early US data releases with weekly jobless claims unexpectedly falling below the 200k mark for the first time since 1969 and (headline) producer price inflation accelerating faster than forecast (0.6% M/M, 2.2% Y/Y). (European) stock markets managed to overcome initial weakness, while Brent crude slightly drifted off cycle highs. US stocks eventually closed with minor losses. Risk sentiment didn't influence bond trading. Fed governors Brainard, Clarida, Williams and Bullard sounded unison: the bar to hike rates is very high given tepid inflation. A rather weak 30-yr US bond auction triggered some underperformance of the very long end of the curve near the end of the US trading session. US yields added 3.1 bps (10-yr) to 3.9 bps (5-yr) in a daily perspective. The German yield curve shifted 1 bp to 1.6 bps with the belly of the curve underperforming the wings. Peripheral yield spreads vs Germany narrowed by 5 bps to 9 bps.

Asian stock markets trade mixed this morning with China underperforming. Investors await the publication of monthly Chinese trade data. Core bonds hover sideways.

Today's eco calendar is extremely thin with only outdated EMU industrial production figures (February) and April US Michigan consumer confidence.
National production data suggest upward risks compared to the -0.5% M/M consensus. Consumer confidence is forecast to stabilize at March levels which would suggest that January weakness was a one-off. JP Morgan Chase and Wells Fargo kick off Q1 earnings season. Earnings might play an important market-driving role in coming weeks if firms start downwardly adjusting their outlook given slowing growth momentum. We have no strong view for today's session.

Long term view: markets concluded that the ECB missed out on this cycle. They even start pondering the possibility of an additional deposit rate cut. The downtrend in the German 10-yr remains in place with the all-time low (-0.2%) in sight. Regarding Fed policy, markets now discount a 60% probability of a Fed rate cut by December. The US 10-yr yield fell through the lower bound of the 2.5%-2.79% trading range, continuing the downward trend since the beginning of March. The previous support was retested last week, strengthening the break lower. Next support levels are the 2.3% area (intermediate) and 2% zone (key).

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KBC Market Research Desk

KBC Bank

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