Eco calendar remains thin, but plenty of Fed speakers


Core bonds open the week in slow-motion

Core bonds initially held a sideways trading pattern in a risk-on environment, but some moderate, gradual erosion occurred during the US session. The calendar was razor-thin, but "hawkish" comments of NY Fed Dudley temporarily accelerated the decline in the US Treasuries. Afterwards, the decline continued at a snail's pace. Equities held up well, eking out nice gains and closing at new highs (S&P/Dow). The move in the Bund didn't go far (divergence with US Treasuries). We wouldn't draw too many conclusions, but we retain bond sensitivity for Fed talk and equities. The US curve bear flattened while German yields barely changed. Intra-EMU spreads versus Germany (10-yr) narrowed 2-to-5 bps for the periphery, with Spain underperforming (-1bp).

NY Fed Dudley said "if we were not to redraw accommodation, the risk would be that the economy crashes to a very, very low unemployment rate and generates inflation. Then the risk would be that we would have to slam on the brakes and the next stop is recession". It shows the Fed's desire to continue hiking rates gradually. Inflation was a little lower than the Fed would like, but Dudley isn't overly concerned about it. The labour market is doing relatively well and "confidence is very, very high". Wage growth should quicken as the job market tightens further. The expansion has quite a long way to go, he concluded.

Chicago Fed Evans leans more in the direction of Dallas Fed Kaplan who said earlier "he wants to see more progress on achieving the 2% target before taking the next step". Evans said there were only small differences in whether the FOMC hikes rates 2,3 or 4 times in 2017. "And given we may be facing more elevated risks for some time, remaining accommodative could help reduce the risk of returning to the zero lower boundary". He added that policy accommodation needed to slow to enable the Fed to reach its 2% inflation target, but his inflation forecast is "not quite as sanguine" as the FOMC median.


Eco calendar remains thin, but plenty of Fed speakers

The eco calendar is thin and the US and EMU. Speeches of Fed governors Fischer, Rosengren and (Kaplan) are more interesting if they touch on monetary policy (official topic: macro prudential conference).

The FOMC held on to its plans to hike rates three times this year and to start the normalization of the balance sheet, despite mistrust of markets. Governor Kashkari already explained his dissent at the FOMC meeting by saying he prefers the risk of not raising rates too soon, as lower core inflation might not be transitory. Governors Kaplan and Evans voted for a rate hike, but are cautious to take the next step. Influential NY Fed governor Dudley talked the other direction showing the desire to continue withdrawing accommodation and highlighting some discord inside the FOMC about the persistence of the current eco softness.


Fed speakers wildcard

Overnight, Asian stock markets trade mixed despite yesterday's strength on WS with Japan outperforming on the back of a weaker yen. The US Note future and Brent crude traded lacklustre, suggesting a neutral opening for the Bund.

Today's eco calendar is empty suggesting more low volume neutral trading in tight ranges (both Bund and US Note future). Speeches by Fed governors are wildcards for trading. However, Fed vice-chair Fischer and Boston Fed Rosengren speak at a macro prudential conference while Dallas Fed Kaplan already talked during the weekend. He stroke a slightly dovish note by warning that the slump in eco data shouldn't continue forever. Chicago Fed Evans echoed that overnight, warning it could delay a next rate hike to December. The latter however also implies that the Fed currently targets a September move, a scenario which isn't discounted at all (26% probability).

US yields are above (5yr), close to (10y) and below (30y) key support levels even as the Fed held on to the blueprint of its future tightening cycle last week. If support levels in US yield terms hold, we recommend a cautious sell-on-upticks strategy. Our basis assumption remains that the long term rally of core bonds is over as policy normalisation slowly starts (ECB) or accelerates (Fed).


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