German IFO main release of the day
Modest reaction on cancellation health care bill vote
Global core bonds traded with a small upward bias on Friday, ignoring mixed eco data. EMU PMI’s recorded another monthly increase, matching the highest level since Q1 2011. US durables goods orders also surprised on the upside, but the forward looking capital goods orders component disappointed. Neither eco report triggered market reaction as worsening prospects for the passing of the health care bill dominated. Late in the US session, House speaker Ryan pulled the heath care bill vote, triggering a sell the fact reaction in the US Treasury and equity market. Equities nevertheless closed narrowly mixed, off the lows. The dollar rebounded on the news to close nearly unchanged. Markets’ faith in Trump’s reflation policy isn’t completely gone yet. In a daily perspective, the German yield curve bull flattened slightly with yields between 0.6 bps (2-yr) and 2.8 bps (30-yr) lower. Changes on the US yield curve varied between +0.5 bps (2-yr) and -1.6 bps (30-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany narrowed up to 4 bps (Portugal). Portugal recorded its smallest budget deficit in 40 years.
German IFO main release of the day
The March German IFO business sentiment headline composite index is expected to stabilize at 111.1 with a slight increase in the current situation sub-index compensated by a slight decline of the expectations sub-index. Following Friday’s stronger than expected German PMI survey, we put the risks on the upside of consensus. If correct, it would bring the index to the tops registered in 2007 and 2010. The euro area M3 money supply is interesting, but no market mover. We especially look for signs that loans to households and business are accelerating. Regarding central bankers, ECB Praet and Fed Evans will speak. The latter spoke already a few times in the past days and should not bring new info. Regarding ECB Praet, we will scrutinize whether he will try to push back on growing market expectations that the stronger eco data might accelerate the exit policy.
US 2-yr Note auction
The US Treasury starts its end-of-month refinancing operation today with a $26B 2-yr Note auction. Currently, the WI trades around 1.25%. Tomorrow; the Treasury continues with a $34B 5-yr Note auction. On Wednesday, they conclude with a $13B 2-yr FRN auction and a $28B 7-yr Note auction.
This week’s scheduled EMU bond supply comes from Germany, Finland and Italy. Tomorrow, the German Finanzagentur holds a €4B 2-yr Schatz auction (€4B 0% Mar2019). On Wednesday, the Finnish treasury holds a 7-yr RFGB auction (€1B 0% Sep2023). On Thursday, the Italian debt agency concludes the supply operation, but bonds and the amount on offer still need to communicated.
How strong is market’s faith in reflation trade?
Overnight, Asian risk sentiment deteriorated after the initial tepid reaction to the Republican health care downfall. Asian stock markets lose up to 0.5% with Japan underperforming on a stronger yen. USD/JPY slides further, hitting new short term lows (see FX). US Treasuries eke out gains.
We expect a stronger opening for the Bund.
Today’s calendar contains German Ifo business sentiment (upside risks) and EMU M3 money supply data. We don’t expect the data or central bank speakers (ECB Praet & Fed Evans) to influence trading. The Republican failure to push the health care bill through could signal problems ahead for Trump’s economic agenda and might falter markets’ faith in the reflation trade. That could underpin US Treasuries this week. In yield terms, the US 10-yr yield could be up for a test of 2.3% support e US 10-yr yield. That could be an opportunity to position again for higher US yields.
Technically, we expect the US 10-yr yield to trade in the 2.3%-2.64% range. Longer term, we maintain our scenario of 4 rate hikes in 2017 and higher long term yields. The German 10-yr yield moved at a rapid pace from the 0.2% lower bound of the sideways range towards the 0.5% upper bound, but a break didn’t occur. Like in the US, we expect range trading ahead of the French elections. Comments on the central bank’s exit strategy could still influence the front end of the European yield curve. The March ECB meeting and recent talk by ECB comforted our call that another “calibration” of the ECB’s QE programme will happen in H2 2017.
Author
KBC Market Research Desk
KBC Bank
