Lack of follow-through action after FOMC

Lack of follow-through action after FOMC

Lack of sustained follow-through selling characterized yesterday's trading session, even as an attempt of US Treasuries to rally in mid US session was aborted too. Market participants aren't convinced yet to buy into Wednesday's hawkish FOMC message. They probably want evidence from the inflation front first before taking up additional bets on higher rates. Technical considerations could have been at play as well given the US Note future's 9 straight day decline. Weekly jobless claims and Philly Fed Business outlook both printed on the positive side of expectations while EMU confidence set a cyclical high. They couldn't give sustainable direction either.

In a daily perspective, US yields were flat (2-yr) to 1.2 bps higher (5-yr) in the 2- to-10-yr sector of the curve. The very long end bucked again the trend and fell 0.4 bps, flattening the very long end (FOMC inspired). German yields rose up to 1.9 bps (5-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany ended unchanged with a peripheral underperformance (+2/3 bps).

Business confidence and central bank speakers

The September US & EMU PMI business confidence data are highlights today. Both are expected to show only minor changes compared to August. US manufacturing PMI confidence is expected slightly higher (53), erasing part of August decline, but in fact close to the levels of the past six months. The weaker dollar hadn't yet a substantial impact. The services confidence has gone steadily up in the past months to 56 and for December some consolidation is expected (55.7). In EMU, manufacturing PMI reached a cyclical high in August at 57.4 despite a stronger euro. Consensus expects a minor decline to 57.2. Given the high level we are inclined to follow the consensus, even if we haven't noticed any sign of slowing activity. The EMU services PMI is expected marginally higher at 54.8 (from 54.7). While the level is still okay, we are well below April's peak of 56.4. We see risks on the upside of consensus.

The event calendar is crammed by ECB members Draghi, Coeuré and Constancio, all three Executive Board members. We know that the discussions on the fate of the APP programme in 2018 are ongoing. We got already hawkish comments of the usual (hawkish) suspects Weidmann, Knot and Lautenschlager, but the influential Executive board members have kept their lips sealed.

Decisions will be taken at the October meetings. Markets will closely listen to see in which way the debate turns. Following Wednesday's FOMC meeting, the comments of the regional Fed governors George (hawk), Williams (centre) and Kaplan (slightly dovish) might give markets maybe more guidance about the outlook for a December rate hike. We suspect George was the author of the highest dot (2 rate increases this year). Williams should have been in the majority camp (1 rate hike), while Kaplan might have been in the majority group (1) or one of the four governors who projected no rate hike anymore in 2017.

Profit taking on short positions ahead of the weekend?

Risk aversion reigns overnight after North Korea threatened to detonate an H-bomb in the Pacific. The threat is a reaction to extra economic sanctions and to US President Trump's speech before the UN where he warned that the US would totally destroy North Korea if America was forced to defend itself and its allies. Asian stock markets trade in red and the US Note future and Japanese yen gain ground. We expect a stronger opening for the Bund as well.

Today's eco calendar contains some EMU/US PMI's. We expect near consensus outcomes, suggesting that they won't be the main impetus for trading. Risk aversion will dominate trading, offering investors the opportunity to take some profit on short positions in the German Bund and US Note future. Central bank speakers (both ECB and Fed) are wildcards for trading. The front end of the US yield curve can underperform if Fed governors stress their willingness to hike rates in December (especially non-hawks Kaplan/Williams). ECB heavyweights can touch on the future of APP. Sunday's German election outcome, even if near certain, could still trigger some safe haven flows.

After the FOMC meeting, we concluded that US Treasuries re-entered a sell-on-upticks phase after the Fed confirmed his view on 2017/2018 interest rate policy. A December rate hike isn't fully discounted yet. Short term though, we expect some correction higher. We hold a sell-on-upticks view in the Bund as well as the ECB's normalisation process slowly takes off. From a technical point of view, both the Bund and the US Note future fell below uptrend lines (early September) since the start of summer, making the picture neutral from bullish.

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