Hawkish ECB Minutes are bearish signal for Bunds

KBC Market Research Desk KBC Bank

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Hawkish ECB Minutes are bearish signal for Bunds

The German Bund and US Note future took again a different direction yesterday. The German Bund significantly underperformed after hawkish ECB Minutes which suggested a change in forward guidance early 2018. The Euribor 3m forward curve bear steepened with markets now discounting positive 3m Euribor rates in Q3 2019 vs Q4 2019 earlier. US Treasuries didn’t suffer from spill-over selling. Disappointing PPI’s were even marginally supportive. Eventually, the US curve flattened. The front end suffered from hawkish comments from Fed Dudley. The outgoing NY Fed President favours 3 rate hikes, but warned for risks of an overheating economy. The long end of the curve profited from a spectacular 30-yr Bond auction.

US yield changes ranged between +0.5 bps (2-yr) and -3.1 bps (30-yr). German yields rose by 1.7 bps (30-yr) to 6.3 bps (5-yr) in a daily perspective. 10-yr yield spread changes versus Germany were limited between -2 bps and +2 bps with Greece underperforming (+14 bps) and Portugal & Spain outperforming (-5/6 bps).

Most Asian stock markets gain ground overnight in line with WS’s yesterday with Japan underperforming. Brent crude briefly spiked to $70/barrel yesterday, but couldn’t maintain gains and returned to $69/barrel. The US note future trades flat, suggesting a neutral opening for the Bund.

Today’s US eco calendar heats up with CPI and retail sales. Consensus expects a 0.1% M/M increase for the headline inflation reading (2.1% Y/Y) and a 0.2% M/M rise for the core measure (1.7% Y/Y). CPI readings have market moving potential in the current volatile US Treasury market. We think that especially higher CPI data won’t go unnoticed since the US 10-yr yield’s technical break above 2.5% earlier this week (bearish signal US Treasuries). The technical break suggests a move to 2.63%/2.64%. US retail sales are forecast to increase 0.5% M/M in December, but activity data lost their market-moving appeal recently.

The EMU eco calendar is empty. German trade union negotiations about pay rises haven’t concluded yet. German wages are expected to be pivotal to start an upward spiral in EMU price dynamics and could be a bearish signal for Bunds. We expect the German 10-yr yield to rise towards 0.62%. Yesterday’s hawkish ECB Minutes suggest more short term repositioning, anticipating perhaps already changes to the ECB’s forward guidance in March. Strong global growth, rising inflation expectations and the global push to monetary normalisation are bearish factors for bonds medium term.

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