Powell to confirm Fed’s path to policy normalization

KBC Market Research Desk KBC Bank

Global core bonds took a slow start to the week, recording minor gains. The Bund came close to 159.75 resistance but a test didn’t occur. US yields declined by 1.6 bps (2-yr) to 0.2 bps (30-yr). The German yield curve was unchanged (5-yr) to 1.5% bps (30-yr) lower. 10-yr yield spread changes versus Germany were nearly unchanged with Italy (-5 bps), Spain (-4 bps) and Portugal (-4 bps) outperforming. The Kingdom of Belgium launched its debut green OLO via syndication. The 15-yr bond (€4.5bn Apr2033) was priced to yield MS -14 bps, compared to initial price takings in the MS -11 bps area.

This morning, the US Note future hovers near yesterday’s closing levels even as global sentiment on risk remains positive in Asia. We expect a neutral to marginally negative opening for the Bund.

Today’s eco calendar is heavily packed containing, amongst others, German CPI data, EMU economic confidence and EMU money supply. In the US, the advance trade balance, inventory data, durable goods orders, housing data, Richmond Fed manufacturing index and Consumer confidence (Conference Board) will be published. ECB’s Merch and Weidmann will speak. Fed Chairman Powell will attend its first hearing before the House Financial Services Committee

German HICP is expected to rise 0.6% M/M, but the Y/Y measure is expected to ease from 1.4% to 1.3%. So, the inflation picture in EMU probably remains soft. The market reaction to the (US) eco data might be guarded as the investors’ focus will go to the hearing of Fed Chairman Powell on Capitol Hill. Fed chairs traditionally hold close to the official policy line (as mirrored in the Minutes) at these semi-annual hearings. He will probably confirm that solid US growth requires further policy normalization. We look out what he says on fiscal stimulation at this point in the economic cycle. Will he give any (hidden) hint that the Fed should counterbalance rising deficits? His message will be balanced, but in the end we expect him to indicate higher yields. In this context, we don’t see much room for a further upward correction in US Treasuries. The ST picture for the Bund is a bit more constructive than for the US 10-y Note future.

US and German yields cleared resistance levels earlier this year and are moving towards next targets. The trading band for the US 10-yr yield is 2.64%-3.05%. The German 10-yr yield’s trading band is 0.62%-1.06%. A move to the lower bound of this range could be used to put up new Bund short positions.

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KBC Market Research Desk

KBC Bank

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