Fed doesn't change course

KBC Market Research Desk KBC Bank

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Core bonds had an uneventful trading session yesterday. The German Bund hovered around opening levels from start to finish, ignoring Italian underperformance following the EC's new Autumn forecasts. US Treasuries faced minor selling pressure towards the end of trading after the release of the Fed's policy statement. The US central bank kept interest rates unchanged, but isn't worried by the recent uptick in volatility or from global growth worries. The US economy is still firing on all cylinders, warranting a December rate hike. The only minor change in the statement was the assessment of business fixed investments which the Fed admits has moderated from its rapid pace earlier this year. US yields increased by 0.2 bps (10-yr) to 1.2 bps (5-yr) in a daily basis. The German yield curve bear steepened marginally with yields creeping 0.3 bps (2-yr) to 1 bp (30-yr) up. 10-yr yield spread changes vs Germany ended unchanged with only Italy (+5 bps) underperforming.

Asian stock markets lose ground overnight with China, and to a lesser extent Japan, underperforming. The US Note future has a minor upward bias with Brent crude doing its utmost best to stay above $71/barrel support. We expect a neutral opening for the Bund.

Today's EMU eco calendar is empty. The US agenda contains October PPI and November Michigan consumer confidence. Producer prices are worth watching given market's sensitivity to price data. Consensus expects a 0.2% M/M and 2.5% Y/Y increase for the headline reading and 0.2% M/M and 2.3% Y/Y for the core. Upward surprises won't go unnoticed. Fed Williams, Harker and Quarles are the first ones on the wire after last night's FOMC meeting. Data and Fed speeches hang in the balance with the US long weekend (Veterans Day on Monday) which generally tends to attract some safe haven flows. Oil prices (Brent at risk of losing key support with Sunday's OPEC+ meeting key) and risk sentiment (S&P rebounds into 2811/2816 resistance) are wildcards. Overall, we have a minor upward intraday bias for today, but without technical consequences.

The US 10-yr yield will eventually be attracted to the 3.26% resistance level given the Fed's go ahead with the tightening cycle. We continue to expect a break higher going into year-end. The German 10-yr yield trades in the middle of the 0.3%-0.6% sideways range with no immediate risks of a break-out in either direction.

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KBC Market Research Desk

KBC Bank

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