The Crimean parliament voted to join Russia

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Yesterday, German yields ended 3.7 bps (30-yr) to 5.1 bps (5-yr) higher. In the US, the yield curve bear steepened with the 30-yr yield 4.2 bps up on the day.
The Crimean parliament voted to join Russia, but global markets didn’t react to the news. As we approached the verdict of the ECB, the Bund started sliding.
Eventually, the ECB kept all rates unchanged (as did the BoE earlier on the day) and triggered a spike lower in the Bund. US jobless claims beat market consensus and slightly weighed on the US Note future. During the press conference, the Bund reached the intraday low, but the release of the ECB’s 2016 inflation forecast, a meagre 1.5%, eventually blocked the downside. For a complete review of the ECB meeting, please read our Flash report.

Today, the focus will be on the US payrolls report, while also the German industrial production data and US trade balance will be released. Fed’s Dudley is scheduled to speak and the ECB will announce the amount of LTRO repayments.

Both in December and January, the US payrolls report surprised on the downside of expectations, due to poor weather conditions. Also for February, weather conditions probably remained a factor especially in the middle of the month when the payrolls survey was conducted. The consensus is looking for an increase in non-farm payrolls by 150 000, up from the 113 000 rise in January. As weather conditions remained extremely poor during the reference week, we believe that the payrolls might continue to surprise on the downside, although economic data in the US seem to have improved somewhat recently. The unemployment rate is forecast to have stabilized at 6.6% in February, following a steep downtrend in the previous months. The risks, if any, might be for a downward surprise. Released together with the payrolls report, the US trade data will probably pass largely unnoticed. The consensus is looking for a marginal drop in the deficit from $38.7B to $38.5B. Finally, German industrial production is expected to have rebounded in January, following a 0.6% M/M decline in December. The consensus is looking for a rebound by 0.8% M/M.

NY Fed governor Dudley and Philly Fed governor Plosser joined other governors’ rhetoric that the Fed should rethink its forward guidance. Both gentlemen referred to the Bank of England’s twist as a good example. Under such scenario, the Fed would de-emphasize the importance of the jobless rate (which is currently just above the Fed’s 6.5% threshold) and instead look at a broader array of economic indicators.

Furthermore, Dudley is the first senior official to suggest that important changes to the Fed’s statement could be unveiled as soon as at the next meeting on March 18-19.

Today, rating agency Moody’s is expected to give an update on the Belgian Aa3-rating (negaive outlook) and on the Dutch Aaa-rating (negative outlook). We will especially keep a close eye on the verdict for Belgium. Last week, S&P raised the outlook on its AA rating for the country from negative to stable. We think similar action by Moody’s is possible today. Regarding the Netherlands, an outlook upgrade is possible as well as Moody’s did the same for the German and Austrian Aaa ratings last week. One of the main reasons is the reduced risk of additional contingent liabilities stemming from the EMU debt crisis.

Overnight, most Asian equity indices trade positive with an Indian outperformance on the back of election hopes (polling results). The US note future trades flat, suggesting a neutral opening for the Bund today.

Today, all eyes will be on payrolls report. We see risks for another wheather-related downside surprise. As the consensus bar is not that high (149k), chances of a big undershoot are slim. Overall, even in case of a slightly weaker outcome we see limited upside for core bonds. On top, risks for the unemployment rate are also on the downside of expectation, ie the indicator could hit the Fed’s 6.5% threshold. This would have a dampening effect on a weaker payrolls number.

At the start of this week, we put forward three factors that would determine the next move on bond markets. Especially for the German market, with the 10-yr yield toying with key 1.6% support, these events are key. The first one, Ukraine, seemed to be put to the background. Yesterday’s intensification of the Crimean crisis didn’t move global markets any longer. This remains a wildcard, though for now the importance had diminished. The second factor, the ECB, kept policy unchanged and president Draghi didn’t sound specifically dovish. If the final factor, today’s payrolls, is not a huge miss (>50k below consensus), we believe that the upside on bond markets is well protected and eye return action to the lower bound of the February range (141.20 Bund & 123-15 + Note future).