Global core bonds stabilized yesterday following Friday's profit taking move. News flow was thin apart from a mixed US empire manufacturing business survey. Stock markets floated between small gains (Europe) and losses (US) with Brent crude showing early signs of topping off. Chicago Fed governors Evans and ECB Villeroy spoke after European close. Evans, a dove, currently sees rates on hold until the fall of 2020. He added though that policy would actually be restrictive if core inflation (currently 1.8% Y/Y) were to move down to 1.5% Y/Y. That would naturally call for a lower funds rate, he said. ECB Villeroy was the strongest advocate of changing/reviewing the central bank's negative interest rate policy because of side-effects with regard to financial stability. Somewhat surprising, he argued that the benefits of this policy still outweigh the drawbacks. Their comments didn't trigger dovish repositioning in short term rate markets. Daily changes on the German yield curve were close to unchanged with the very long end of the curve underperforming (30-yr: 1.2 bps). US yields shed 0.1 bp (2-yr) to 1.1 bp (10-yr). 10-yr yield spreads vs Germany widened by 1 bp to 4 bps (Italy).
Asian stock markets are positively oriented overnight with China outperforming. The US Note future trades directionless with the Bund underperforming. Today's eco calendar contains German ZEW investor sentiment (April), US industrial production (March) and US NAHB housing index (April). Risks for the ZEW are probably on the upside because of the strong stock market rebound early April. US production data will probably remain soft in light of global weakness in mainly external demand. The housing index could show more signs of bottoming out. Data probably won't push markets in one specific direction. Speeches by ECB Nowotny and Fed Kaplan are wildcards for trading. Johnson & Johnson, BlackRock and Netflix are amongst the firms reporting Q1 earnings today. Earnings might play an important market-driving role in coming weeks depending on whether or not firms downwardly adjust their outlook given slowing growth momentum.
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 fell closed above the lower bound of the previous 2.5%-2.79% trading range. A confirmation would turn the technical picture more neutral again.
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.
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