Eco data overshadowed by looming Fed?

Global core bonds ended unchanged yesterday in choppy trading. Main US indices ended flat. The US eco calendar contained mixed second tier numbers. Brent crude tested this year’s high around $68/barrel. A possible extension of oil production cuts have been the buzzwords lately. UK Parliament voted in favour of extending the March 29 brexit deadline, but that was discounted. US yield changes ranged -0.4 bps (2-yr) and +0.9 bps (10-yr) with the very long end of the curve underperforming (30-yr +3 bps). The German yield curve shifted 0.4 bps (2-yr) to 2.1 bps (10-yr) higher. 10-yr yield spread changes vs Germany narrowed by up to 3 bps with Ireland (-5 bps) and Italy (-7 bps) outperforming.

Most Asian stock markets are upwardly oriented with China and Japan outperforming (>0.75%). Chinese premier Li Keqiang said that the country can use reserve requirements and interest rates to support the economy. Xinhua news agency said that Chinese VM Liu He spoke with key US officials (Mnuchin, Lighthizer) by telephone, with both sides making substantial progress on trade talks. Core bonds edge carefully higher overnight despite these positive vibes. The BoJ downgraded its economic assessment, but refrained from taking policy actions. North Korea supposedly reconsiders denuclearization talks with the US after last month’s failed Summit.

Today’s US eco calendar contains Empire manufacturing survey, industrial production and Michigan consumer confidence. Sentiment gauges are forecasted to show a modest uptick in March. We see upside risks. Industrial production is expected to rebound by 0.4% M/M in February following a very weak January outcome (-0.6% M/M). Eco data might in theory weigh on US Treasuries, but US investors start to look forward to next week’s FOMC meeting. Fed chair Powell already suggested in front of US Congress to halt the balance sheet run-off by the end of the year. That’s much sooner than the Fed originally had in mind and market participants had expected until the turn of last year. Apart from this, we only expect the Fed’s plotted rate hikes to drop from 3 currently (2 in 2019 and 1 in 2020) to maximum 1. Long term bond yields will probably remain under some downward pressure in anticipation of a dovish Fed remaining sidelined for longer. The US 10-yr yield is heavily testing intermediate support (2.61%). A break lower becomes likelier, with a return to the lower bound of the 2.49%-2.78% range.

Last week’s decision by the ECB to delay the earliest timing for an interest rate hike into 2020 pulled German yields to their lowest levels since the end of 2016. In combination with the grim outlook, it might mean no ECB rate hikes at all this cycle. The technical picture suggests a return to negative levels for the German 10-yr yield unless we see a pick-up soon in growth/activity data.

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