Err on the cautious side going into key eco data

Rates

Global core bond trading showed two faces yesterday. They lost ground in Asian and European dealings following stronger-than-expected Chinese activity data. The German economy ministry was less optimistic, by downgrading this year's GDP forecast from 1% to 0.5%. Bond sentiment improved without a strong trigger as US investors entered the session with both the Bund and US Note future returning to opening levels. European stock markets managed to cling to gains, unlike US ones. The Fed's beige book reported a "slight-to-moderate" pace of growth in recent weeks. Retailers blamed unusually cold weather while manufacturers and the agricultural sector continue to worry over the trade conflict. The housing sector appears to be in a bright spot. The tight labour market makes it hard to fill vacancies despite higher wages. Daily changes on the US yield curve ranged between -1.2 bps (2-yr) and +0.4 bps (10-yr). German yield changes fluctuated between -0.1 bp (2-yr) and +1.4 bps (10-yr). 10-yr yield spread changes vs Germany ended close to unchanged.

Asian stock markets lose up to 1% this morning with South Korea underperforming. The US S&P 500 showed a tentative bearish engulfing pattern yesterday, hinting at a near term correction lower. Core bonds extend gains while USD/JPY retreats following multiple (failed) tests of important resistance. These all suggests more difficult times ahead.

Today's eco calendar contains EMU PMI's, US retail sales, Philly Fed business outlook and weekly jobless claims. April PMI's are expected to show tentative signs of bottoming out, but (manufacturing) gauges will remain in contraction territory. Most outcomes, bar a significant positive surprise which we don't expect, will probably underpin core bonds with Bunds outperforming. US retail sales are forecast to rebound following a dismal February. Higher oil prices will benefit and strong car sales will benefit the headline measure, but strong winter weather could still hurt core gauges. We prefer to err on the cautious side for US eco data as well, underpinning our positive intraday bias for bonds.

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 so far. Regarding Fed policy, markets now discount a 40% probability of a Fed rate cut by December. The US 10-yr yield closed above the lower bound of the previous 2.5%-2.79% trading range. A confirmation would turn the technical picture more neutral again.

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