German 10-yr yield tests 0.5% resistance, no break yet

KBC Market Research Desk KBC Bank

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Global core bond weakness initially persisted yesterday. Both the Bund and the US Note future reached in an intraday low as UK CPI inflation unexpectedly rose to its fastest pace in 6 months. The move in the Bund coincided with a test by the German 10-yr yield of the upper bound of the 0.3%-0.5% trading range.
The test was rejected in absence of big eco/event news. BTP's suffered a small setback as 5SM Di Maio is reported looking for a bigger deficit (2.5% of GDP) than eyed by FM Tria and Lega Salvini. Core bonds found a better bid at the start of US trading, but the move lacked momentum. The German yield curve steepened with yield changes ranging between -0.5 bps (2-yr) and +1.4 bps (30- yr). The US yield curve steepened as well with daily yield differences between -0.8 bps (2-yr) and + 0.8 bps (30-yr). 10-yr yield spread changes vs Germany widened slightly with Italy (+5 bps) underperforming.

Asian stock markets opened positively this morning, but sentiment is dwindling with most indices now just below water. Brent crude oil approaches the $80/barrel mark again, but the US note future is flat. We expect a neutral opening for the Bund.

Today's eco calendar contains US weekly jobless claims, which are expected to hover near multidecade lows (210k), and Philly Fed Business outlook. The latter is expected to rebound (18 from 11.9) following an exceptional crash in August. This week's disappointing empire manufacturing survey and the lingering US/Chinese trade conflict at the start of the month probably limit a bigger bounce than consensus forecasts. ECB Praet, whose views align with the one's from ECB president and hawkish Bundesbank president Weidmann speak. Overall, we expect more sentiment-driven and technically-inspired trading.

Tuesday's technical breaks in US yields suggest a test of the cycle highs in the run-up to next week's FOMC meeting. US yields started a nice upleg after September payrolls showed wage growth accelerating at its fastest pace this expansion. Other US eco data point to a continuation of current strong growth with more and more signs of additional inflationary pressures. This caused a repositioning higher in US yields, anticipating a longer US Fed tightening cycle, our long favoured scenario. The German 10-yr yield followed the US 10-yr yield higher and is testing the 0.5% upper bound of the 0.3%-0.5% sideways range. ECB's veiled upbeat comments on EMU inflation and the relief rally in Italian BTP's play an additional role.

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KBC Market Research Desk

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