Side-lined ahead of next week’s key US eco data

KBC Market Research Desk KBC Bank

Next Report will be published on Wednesday 2nd May, 2018.

Rates

Global core bonds managed to eke out gains yesterday following six straight trading days suffering losses. The main move occurred in the run-up to and after the ECB meeting. The ECB kept its monetary policy and forward guidance as expected unchanged. The tone of Draghi’s press conference reflected recent comments made in a speech. The central bank admitted that recent data point to some moderation, coming off exceptionally high levels, but now wants to see whether this setback is temporary or permanent. Draghi said that monetary policy wasn’t discussed which might imply that changes to the forward guidance could only occur in July rather than in June. It was perhaps a slightly dovish element in an otherwise rather neutral statement. Click HERE for a full review of the ECB meeting. Strong US equity markets put an intraday cap on core bonds during US dealings.

German yields eventually declined by 1.2 bps (2-yr) to 4.1 bps (10-yr). The US yield curve shifted 0.6 bps (2-yr) to 4.5 bps (10-yr) lower with the 10-yr yield dropping back below the psychological 3% mark. 10-yr yield spread changes vs Germany widened 1 bp.

Asian stock markets trade less positive than WS yesterday with Chine underperforming. The BoJ removed language about the timing of hitting the 2% inflation target, but markets neglect it. The US Note future trades a tad higher and that could be reflected in the opening of the Bund as well.

Today’s eco calendar contains EMU confidence data, the German labour market report and Q1 US GDP. Markets will be more sensitive to EMU data after yesterday’s ECB meeting with Draghi and co monitoring them very closely to see whether the setback is temporary or permanent. Other April confidence data confirm the expected stabilization around 112. Q1 US GDP is forecast at 2% Q/Q annualized, but this slowdown should be discounted given Q1 figures. The onus for US markets is on next week’s eco data (ISM’s, ADP, payrolls) and Fed meeting which could result in a more neutral trading today.

The recent core bond sell-off lifted US yields towards 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 test/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%. Yesterday’s ECB meeting shouldn’t be a structurally hampering factor.

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KBC Market Research Desk

KBC Bank

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