The eco calendar is thin

Yesterday, German Bunds caught up on US Treasuries’ post FOMC losses during the morning session, but the downward correction fizzled out in early US dealings. The Bund recouped some losses before trading sideways. US Treasuries held a sideways pattern tested the key 2.80%, but couldn’t take it out and closed nearly unchanged. German bond yields were up between 2 (30-yr) and 6 (5-yr) bps. US eco data were near consensus (Existing Home sales and claims) to much better (Philly Fed), but had no lasting impact. Similarly the agreement on EU banking union (Single Resolution Authority) and the French and Spanish auctions failed to give direction.

Today, the eco calendar is thin, especially in the US, while in the euro zone the first estimate of European Commission’s consumer confidence will be released. EU leaders will continue their two-day Summit in Brussels, the ECB will announce the amount of LTRO repayments and a whole range of Fed speakers will take the stage after this week’s FOMC meeting.

European Commission’s consumer confidence has made an impressive rebound since last year. Consumer confidence weakened however slightly last month, but remains close to its long-term average. The headline index dropped from -11.7 to -12.7 in February, but an improvement to -12.3 is expected for March, reversing only part of the previous month’s drop. We believe that the risks are for an upward surprise as we believe that political unrest in Ukraine shouldn’t have had a material impact on consumer sentiment.

Following a FOMC meeting, it is always very interesting to listen to the various Fed speakers. They give more colour to the knowledge we get from the FOMC decision and the press conference. The speeches won’t influence trading in the European session given their timing. St-Louis Fed Bullard revealed some time ago that previously he was one of the governors in favour of lifting the Fed funds rate already in 2014. Even before this week’s meeting, he announced that he would switch towards a 2015 lift-off rate projection, which he apparently did as the number of governors in favour of a 2014 rate hike diminished to one. However, it would be wrong to call Bullard an arch-hawk. He is very concerned about too low inflation and wants the Fed to take this sufficiently into account in setting policy. Therefore, it was in the first place a surprise that he initially revealed to favour a 2014 rate hike. He speaks on nominal GDP though today and thus may refrain from policy sensitive comments. Dallas Fed Fisher is one of the most hawkish governors and is in the minority. So, his views carry less weighed for markets, but as he speaks on forward guidance, his comments might be very interesting. Minneapolis Fed Kocherlakota dissented partly at the FOMC meeting, precisely because he feared the way that forward guidance was framed, diminished the Fed’s credibility on fighting too low inflation. We suspect he will elaborate why he dissented. Finally governor Stein (of the Washington board) speaks on monetary policy too. He is known for his views on financial markets and bubbles. Early 2013, he already signalled that some markets were frothy. We think that inside the FOMC concerns about the impact of monetary policy on financial stability have increased. These concerns were maybe the reason why Ms. Yellen talked rather hawkish. In all speeches we also look for explanations why the longer term rate projections showed an upward drift.

Rating agency Fitch affirmed the US AAA-rating and changed the outlook to stable. The action resolves the rating watch negative placement for the country in October. The outlook change reflects the February suspension of the US federal debt limit in a timely manner, unlike the crises in 2011 and 2013. Fitch also cited strong fiscal consolidation and expects a further decline of the federal budget deficit. Fitch added that they don’t anticipate developments with a material likelihood of leading to a US downgrade. S&P affirmed the Greek “B-“. The Greek economy is gradually rebalancing though the general government debt and the economy’s external debt are still large. The outlook is stable, balancing S&P’s view of the government’s commitment to a fiscal and structural adjustment against the economic and political challenges of doing so. We don’t expect either decision to have an impact on bond markets. After European closure, Moody’s will normally update its view on the Cypriot Caa3 rating (negative outlook).

Overnight, most Asian equity markets trade positive with a Chinese outperformance. Japanese markets are closed.

Today, the eco calendar is empty apart from EMU consumer confidence. However, it will be Fed speakers (see above) in late/after European trading that draw most attention following Yellen’s hawkish message after the FOMC meeting. If they confirm her message, we might get a new test of the downside on bond markets. Technically, the US Note future tested the downside of the 123-15+ / 125-06+ channel and the 10-yr yield the upside of the 2.6-2.8% range. We believe that following the FOMC statement, US eco data will become very important. Stronger eco data could push bonds further lower. A break below/above these technical levels paves the way for a return to 121-08+ / 3%. For the Bund, the picture is more nuanced as the possibility of more monetary easing by the ECB remains.