Global core were under downward pressure yesterday

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Global core were under downward pressure yesterday. We had a buy‐therumour, sell‐the‐fact reaction on lower EMU inflation and the weaker US Chicago PMI was bluntly ignored. Fed chairwoman Yellen put a bottom under bond markets when she said that considerable slack in the labour market is evidence that the central bank’s unprecedented accommodation will still be needed for some time. At the end of dealings, the German yield curve shifted 1.1 bps (30‐yr) to 1.8 bps (5‐yr) higher. In the US, yield changes varied between ‐ 3.1 bps (2‐yr) and +1.1 bps (30‐yr).

Today, the eco calendar is enticing with the euro zone (final) manufacturing PMI, the German jobless claims and EMU unemployment rate, while in the US the manufacturing ISM will be released. EU Finance Ministers and central bankers meet in Athens.

According to the first estimate, the euro zone manufacturing PMI weakened slightly in March, from 53.2 to 53.0, in line with expectations. Weakness might have been partly related to the crisis in Ukraine. We believe therefore that the risks are for a limited upward revision as the tensions calmed somewhat recently. Also in the euro zone, the unemployment rate is forecast to have stabilized at 12% in February. If there are any, the risks might be for a downward surprise, we believe. Also interesting will be the details. In January, the number of people unemployed increased slightly following a drop in the previous months. We hope to see unemployment again decreasing in February. Besides the euro zone, also the German unemployment data are interesting. Finally, in the US, the manufacturing ISM is forecast to have increased for a second straight month in March. After a significant drop in December and January, the manufacturing ISM rose from 51.3 to 53.2 in February. A further, albeit limited, increase to 54.0 is forecast for March. Despite mixed regional indicators, we believe that the risks are for a stronger uptick as weather conditions improved during the month.

Fed chairwoman Yellen gave a first public address since her inaugural press conference after the last FOMC meeting. Back then, she sounded rather hawkish by saying that the Fed could raise rates a first time around 6 months after QE tapering is finished. Yesterday, she didn’t come back on any specific timing and talked somewhat more dovish by specifically referring to considerable slack on the labour market. Therefore, “the extraordinary commitment to revive the economy is still needed and will be for some time. I believe this view is shared by my fellow policymakers at the Fed.” We wouldn’t draw too much from it and rather see it as a sign that Yellen doesn’t want markets to overreact on the hawkish message of the previous FOMC meeting.

The ECB holds its weekly MRO tender and liquidity absorbing SMP tender. For the MRO, €93.5B loans mature, while for SMP the ECB will try to drain €175.5B. Last Friday, banks announced that they would only repay slightly more than €1B in LTRO loans after three consecutive weeks of >€10B. The impact on excess liquidity was therefore negligible. The latter remains just above the €100B mark. The eonia rate was coming under modest pressure and yesterday we got an end‐of‐quarter ultimo. The fixing at 68.8 bps was the highest level since end 2011. Tonight we will comment on the results of the MRO and SMP tenders and their impact on eonia rates/excess liquidity in our Sunset report.

Overnight, Asian markets have been busy. The Japanese tankan disappointed, Chinese manufacturing PMI’s were mixed, more Chinese credit concerns (corporate bond default) floated to the surface and the RBA & RBI kept policy unchanged. Asian equities trade mixed with Japan underperforming and China outperforming. The US Note future trades with a slight downward bias.

Today, the final manufacturing PMI’s and German employment data are scheduled in Europe. All attention will go the US manufacturing ISM though. We see risks for an upward surprise, which is a negative for core bonds and could push the US Note future for a new test of 123‐02+ support/2.8% resistance. The spill‐over towards the Bund market could be more limited with Thursday’s ECB meeting in mind.

Technically, the Bund set a minor new contract high (144.08) on Friday after dovish ECB comments, low inflation numbers and ahead of the ECB meeting. In the German 10‐yr yield, we are close to 1.5% key support. We believe these levels will hold this week even if the ECB eases monetary policy on Thursday. The main reason is that we expect strong US eco data. These could push the US 10‐yr yield back towards 2.8% resistance and even force a break higher. This should offset any impact of a potentially soft ECB.