Core bonds lost ground last Friday with US Treasuries significantly underperforming German Bunds following another stellar US payrolls report with 250k new jobs created (vs 200k expected). The unemployment rate stabilized at the 3.7% cycle low, but this occurred against an increase of the participation rate (62.9% from 62.7%). Weekly earnings rose by 0.2% M/M and 3.1% Y/Y as expected with the latter being the fastest wage growth on a yearly basis since early 2009. The US yield curve shifted 6 bps (2-yr) to 8.2 bps (10-yr) higher. The US 30-yr yield reached its highest level since 2014 (3.45%). US stock markets declined after the US payrolls as investors embrace the Fed's tightening goals with higher US real yields as a result. The US 10-yr real yield rose to 1.15%, a 7-yr high. Main US equity indices eventually lost 0.5% to 1%. Comments by US economic advisor Kudlow, who poured cold water on last week's US/China trade deal hopes, weighted as well. German yields added 0.5 bps (2-yr) to 2.9 bps (10-yr). 10-yr yield spread changes vs Germany narrowed by up to 3 bps with Italy (-9bps) outperforming and Greece (+4 bps) underperforming. The peripheral bond rally (excl. Greece) accelerated after an MNI report saying the ECB is considering a fresh round of TLTRO's next year.
Asian stock markets follow WS lower with main indices losing 1% to 2%. Chinese PMI's disappoint with the Caixin Composite measure falling from 52.1 to 50.5, the weakest reading since mid-2016. The US Note future treads water. We expect a neutral opening for the Bund.
Today's eco calendar contains the US non-manufacturing ISM. Consensus forecasts a setback from 61.6, a multi-year high, to 59.1. Risks are tilted to the downside following regional US surveys, but the ISM will remain at very lofty absolute levels. Markets will probably shrug off any negative surprise. Heavy US and EMU supply is negative for core bonds this week. The US Treasury starts its mid-month refinancing operation with a $37bn 3-yr Note auction. Some (US) investors might decide to stay side-lined ahead of tomorrow mid-term elections. Polls suggest Republicans will keep control of the Senate while losing their House majority. This scenario should by and large be discounted. The Eurogroup meets today with ministers likely having a say on Italy's budget ahead of Italy's next week's deadline to send changes to the EC. This might spark some volatility in BTP's, but we don't expect a new sell-off. We have a downward bias for core bonds at the start of the trading week. The US 10-yr yield is closing in on the 3.26% cycle high. Thursday's EC autumn forecast and Fed meeting are this week's other main events.
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