Risk sentiment, US eco data and Powell’s testimony

KBC Market Research Desk KBC Bank

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Global core bonds eked out gains on Friday. The German Bund outperformed the US Note future in the European session and vice versa during US dealings. Some safe haven flows ahead of the weekend, related to today's Trump/Putin Summit might have been at play, but that wasn't visible on other markets. Fed Chair's Powell warning that stagflation would be the worst case scenario of the trade war echoed. Stock markets managed to eke out more (small) gains amid mixed-to-better Q2 earnings for big US banks. The S&P 500 tested 2800 resistance, the final hurdle before the all-time high (2872), but a break didn't occur (yet). US yields eventually declined by 0.8 bps (2-yr) to 2.2 bps (5-yr) on a daily basis. Changes on the German yield curve ranged between +0.4 bps (2-yr) and -1.7 bps (10-yr). 10-yr yield spread changes vs Germany ended narrowly mixed with Italy outperforming (-6 bps). A follow-through effect after Thursday's well received BTP auction?

Asian stock markets lose ground overnight with China underperforming (-0.5%). Chinese eco data (Q2 GDP, retail sales, industrial production, investments) printed mixed. The US Note future stabilizes near Friday's highs. We expect a neutral to slightly stronger opening for the Bund.

Today's eco calendar contains June US retail sales and July Empire Manufacturing survey. Retail sales are expected again strong at 0.5% M/M with US consumers still profiting from tax reforms. A small setback in the empire manufacturing, from 25 to 21 which remains high, is forecast. We expect near consensus outcomes for both gauges, but are wary of negative impacts from the escalation of the US's trade crusade. Q2 earnings will be important for risk sentiment, especially given the crucial technical hurdle in the S&P 500. We have a small positive bias for core bonds at the start of the new trading week.

Focus turns to Fed Chair Powell's semi-annual testimony before US Congress later this week. He recently raised more question marks about the impact of the trade conflict on business investments. This could draw investors' attention even if Powell won't derail from the Fed's gradual rate hike intentions. The EMU eco calendar is uneventful, but supply rather high in thin holiday trading. The combination could cause an outperformance of US Treasuries vs German Bunds this week. Technically, the German 10-yr yield tested support just below 0.3%. A break didn't occur, suggesting room to move higher in the 0.3%-0.5% range. The US 10-yr yield hovers near the middle of the sideways range between 2.71% and 3.12%.

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KBC Market Research Desk

KBC Bank

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