Neutral ECB meeting?

KBC Market Research Desk KBC Bank

Rates

Global core bonds suffered a new setback at the start of European trading before consolidating into the close ahead of today's ECB meeting. The US 10-yr yield manages to stay north of 3%, closing in on key 3.05%/3.07% resistance ahead of next week's important US eco data and Fed meeting. The US 30-yr yield is testing 3.22% resistance, which is the neckline of a massive multiple bottom formation (see graph). Yesterday's eco/event calendar was empty and didn't provide input for trading.

Changes on the German yield curve ranged between -0.3 bps (2-yr) and +0.8 bps (5-yr) with the belly of the curve underperforming the wings. The US yield curve bear steepened again with yields up to 2.6 bps (10-yr & 30yr) higher. 10-yr yield spread changes vs Germany ended nearly unchanged with Portugal slightly underperforming (-3 bps).

Most Asian stock markets trade positive with China underperforming (-1.5%) after rumours of a possible FBI probe into Huawei. The US Note future stabilizes around yesterday's sell-off lows, suggesting a neutral opening for the Bund.

Today's trading will probably be subdued ahead of the ECB press conference. The central bank will normally keep its policy and forward guidance unchanged today. ECB President Draghi warned recently that the growth cycle has peaked even if there remains sufficient momentum. Draghi also expressed more confidence in the inflation outlook. The combination of the growth and inflation comments might signal rising awareness in favor of policy normalization in order to build a war chest for future downturns. We'll be looking for clues in that direction at today's press conference. Nowotny's slip of the tongue, arguing in favor of a 20 bps deposit rate hike shortly after ending net asset purchases, might get some attention as well.
Click HERE for a full preview of the ECB meeting.
From a market point of view, we think that the probability of a dovish surprise is rather low (eg focus on negative consequences from trade conflict). A "neutral" meeting shouldn't hamper a continuation of the recent rise in yields.

The recent core bond sell-off brings US yields at/near key resistance in the 10-yr (3.05%/3.07%) and 30-yr yield (3.22%). Next week's US data might decide on a break with markets especially sensitive to price indicators. The German 10-yr yield bounced off key support levels (0.46%/0.48%), suggesting the start of a new upleg towards 0.8%. Rising inflation expectations are at play.

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KBC Market Research Desk

KBC Bank

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