The consensus is looking for an increase by 0.5% M/M

Rates

Global core bonds continued trading in a narrow range amid a thin eco calendar. German trade data (including strong exports) and a weaker US NFIB small business indicator were ignored. ECB’s Constancio said markets didn’t completely understood last week’s ECB message that he felt the ECB could still do more easing if warranted. The German yield curve bear steepened with yield changes ranging between flat (2-yr) and +2.8 bps (30-yr). In the US, the curve bull flattened with yields up to 1.3 bps lower (30-yr)

Today, the eco calendar remains thin, especially in the US, while in the euro zone the industrial production data will be released. ECB’s Linde, Praet, Coeure and Mersch are scheduled to speak and Germany, Switzerland, Sweden and the US will tap the market.

After falling by 0.7% M/M in December, euro zone industrial production is forecast to have picked up in January. The consensus is looking for an increase by 0.5% M/M. We believe that the headline figure might come out somewhat weaker, but the details will probably look more encouraging. The headline figure will be depressed by poor output of utilities, while manufacturing production should be stronger.

Yesterday’s Ecofin meeting concluded without final agreement on the single resolution mechanism though ministers moved further in the right direction. Key questions remained open though, like the degree to which countries would help each other’s problem banks. Crunch talks with the European Parliament will be held today. The ECB warned on several occasions that the single resolution mechanism should be in place before it takes up the role as single supervisor in November. With parliamentary elections scheduled in May, time is thus running short.

Today , the German Finanzagentur taps the on the run 2-yr Schatz (€4B 0.25% Mar2016). The relatively low amount on offer should be easy to digest for investors. At this year’s previous two Schatz auctions, total bids averaged €8.34B (€7.8B over 2013). Since last week’s ECB meeting, the bond cheapened some 3.5 bps in ASW spread terms and on the short end of the curve, the bond trades rather cheap compared to surrounding German bonds. The EFSF announced a syndicated tap (€2B) of its 4-yr outstanding 1.25% Jul2018. The transaction is expected to be launched and priced today. In the US, the treasury started its mid-month refinancing operation with a little soft $30B 3-yr Note auction. The bid cover (3.25) was just below the average over the prior year (3.31) and the auction stopped a tad above the 1:00 PM bid side. The buyside takedown figures were also quite weak with especially a disappointing indirect bid. Today, the treasury continues its refinancing operation with a $21B 10-yr Note auction.
Currently, the WI is trading around 2.775%.

Overnight, Asian equity indices trade in negative territory with Japan underperforming. Remarkably, it are mainly negative headlines on China, which spoiled market sentiment. The US Note future trades flat overnight though incorporating late-session gains, we might see a slightly stronger opening of the Bund. Today, the eco calendar remains extremely thin. EMU production data are expected to rebound. Following the earlier released national data however, they should have less market moving potential. Several ECB members speak at an event in Frankfurt which can provide interesting headlines, especially after yesterday’s mysterious comments by Constancio (see above). Overall, there is thus again little to guide trading. Of late, the correlation between the Dax and the German Bund was high. So sentiment on risk via equity markets might influence gyrations on the Bund market.

Following last week’s payrolls report, the US Note future tested the downside of its recent trading channel (123-15+; 2.78% in yield terms). A break below would change the technical picture, but given the thinness of the calendar this week we believe that we might have to wait on Thursday’s retail sales to see such a move possibly happening. The German Bund future outperformed last week and is now in the middle of the recent trading range. Given the outcome of last week’s ECB meeting, we believe the upside is blocked and eventually eye for a return towards 141.20 (downside recent range). A sell-on-up ticks strategy is preferred in case bonds fall below the downside of these ranges.