Core bonds gain ground despite stronger eco data
Traditional correlations remain at search on bond markets. In recent sessions, Bunds and US Treasuries lost ground despite weakness on stock markets. Yesterday, global core bonds gained slightly ground despite stronger than expected EMU and US eco data. The move higher accelerated when oil prices hit an air pocket after the release of the IEA's annual world energy outlook (lower demand forecast). Brent crude dropped from $63+/barrel to the low $61/barrel area. The longer end of the curves outperformed. Atlanta Fed Bostic, who took charge around mid-year and votes on monetary policy next year, argued in favour of continuing the gradual rate hike cycle despite weak inflation readings. He added that the national economy is nearing full employment, meaning that a spike in demand (eg by tax reform) could push the economy beyond its sustainable capacity.
At the end of the session, the German yield curve bull flattened with yields up to 2 bps lower (30-yr). The US yield curve shifted in similar fashion with yield changes ranging between +0.6 bps (2-yr) and -4.1 bps (30-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany ended nearly unchanged with Greece underperforming (+3 bps).
Interesting US eco calendar
The US eco calendar is interesting today with CPI inflation, retail sales and empire manufacturing. Headline inflation is expected to have moderated (in line with gas prices) from 2.2% Y/Y to 2% Y/Y (up 0.1% M/M) while core inflation is forecast to have stabilized at 1.7% Y/Y (up 0.2% M/M). A setback in retail sales is predicted from a strong 1.6% M/M in September to flat in October. Excluding car sales, consensus expects a moderation from 1% M/M to 0.2% M/M. The empire manufacturing last month matched the highest level since October 2009. A decline from 30.2 to 25.1 is forecast. We have no reason to distant us from consensus. From a market point of view, such outcomes could be considered as disappointing. Central bank speakers include Chicago Fed Evans and Boston Fed Rosengren. Evans votes on policy this year. He has a rather dovish profile, but favours the gradual rate hike process. Rosengren is more hawkish, but doesn't vote on policy this year or next. The ECB's conference in Frankfurt continues with ECB Praet among today's speakers.
Small German Bund auction
The German Finanzagentur holds its second auction of the week today by tapping the on the run 10-yr Bund (€3 bn 0.5% Aug2027). Total bids at the previous 4 Bund auction averaged €3.68 bn and we don't expect much improvement today. The auction yield will probably be the lowest since June.
Positive bias core bonds today
Asian stock markets trade weak overnight with Japan underperforming (-1.5%). The US Note future profits, suggesting a stronger opening for the Bund. Brent crude seems vulnerable to a deeper correction.
Today's eco calendar heats up in the US. During European trading we expect risk sentiment to play a key role. European stock markets remains fragile and the German Dax approaches first support around 12 900/13 000. A more pronounced downward correction of oil prices could be at play as well. Both are supportive for core bonds (bull flattening) even if traditional market correlations were loose of late. Attention in the US session will probably shift to eco data with inflation and retail sales. A moderation is expected for both series, but in current sentiment investors might consider such outcome rather disappointing. So, we have a positive intraday bias today with the long end of the curves outperforming. Central bank speeches and developments in the US tax reform debate are wildcards for trading.
Technically, US Treasuries will probably trade in the 124-06 to 125-25 range going forward. This corresponds with a 2.3%-2.47% band in yield terms. The trading range for the Bund going forward is between 160.24 and 163.43. Any moves towards the topsides of the ranges could be used to put up short positions.
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