Global core bonds came off the highs

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Global core bonds came off the highs, as equity markets recovered. Strong US industrial production data failed to put bonds under real downward pressure though. Fed Yellen reassured about continued low interest rates though a shift in outlook could always alter the Fed’s plans. She emphasized that her focus was on low inflation (“chances of inflation shooting above its 2% goal are at present significantly below the chances of inflation persisting below 2%”) and economic slack (slack in labour markets is holding down wages). The German yield curve ended 0.7 bps (30‐yr) to 1.5 bps (5‐yr) higher whereas changes on the US yield curve ranged between ‐1.7 bps (30‐yr) and +2.6 bps (5‐yr). On intra‐ EMU bond markets, the gradual spread narrowing continued.

The Fed’s Beige Book had a decidedly more upbeat tone with 10 out of 12 Districts reporting expansion (versus 8 previously). Apart from Cleveland and St. Louis, all Districts said that growth was “modest” or moderate”. Where there were points of softness, they could be attributed to short‐term factors that were likely to ease in the coming weeks. The report said consumer spending was up in most Districts "as weather conditions improved and foot traffic returned." Labour market conditions "were mixed but generally positive". Wages pressures "were contained or minimal" for most Districts, but there were pockets of upward movement for wages in NY and Dallas. Prices were "stable or slightly higher". The FOMC meets next week. Another $10B cut in asset purchases is most likely as the Fed awaits more evidence of eco strength.

Ahead of the long weekend, the eco calendar cools down today with only US jobless claims data and the Philadelphia Fed manufacturing index for release. The ECB will announce the amount of LTRO repayments, France (OAT, OATi & OATei) and the US (5Yr TIPS) will tap the market. Attention will also go out to the meeting of Foreign Ministers on the Ukraine crisis in Geneva.

Last week, US jobless claims data surprised on the downside of expectations falling to 300 000, the lowest level since May 2007. The data might have been distorted at the start of the new quarter and therefore an uptick is expected this week. For the week ending the 12th of April, the consensus is looking for an uptick from 300 000 to 315 000, but we believe that even a higher outcome is not excluded. The late timing of Easter may play havoc with the seasonal adjustment of the claims data increasing risks of distorted figures. For the Philadelphia Fed index it will be interesting to see whether the index improves further in April, after already a substantial rebound in March (to 9 from ‐6.3).
The consensus is looking for a marginal increase to 10, but we believe that the risks might be for a weaker outcome after last month’s strong rebound and the poor NY Fed index earlier in the week.

The French debt agency launches a new 2‐yr BTAN (0.25% Nov2016) and taps the on the run 5‐yr BTAN (1% May2019) for a combined €7‐8B. On the grey market, the new BTAN trades at a 4 bps pick‐up in ASW spreads compared to the previous Nov2015 benchmark. This corresponds with a 13 bps pick‐up in yield. Also compared to other French bonds in the 2016‐2017, there’s a decent pick‐up. The May2019 BTAN didn’t cheapen going into the auction. Overall, we believe today’s auctions will go well. Additionally, France will try to raise €1‐ 1.5B via inflation‐linked bonds.

Overnight, Asian equity markets trade positive though gains are limited compared to WS’s performance. Chinese stocks underperform. After the US closing bell, Google and IBM posted disappointing earnings. The US Note future trades with an upward bias.

Today, the eco calendar contains only US jobless claims and Philly Fed index. However, this week’s very strong US retail sales and industrial production data showed that markets currently have low interest in the eco data. Earnings results and tensions in Ukraine remain important for risk sentiment on equity markets as the latter are in the driver’s seat for trading on bond markets of late. Finally, some positioning going into the long weekend is also possible. Normally that’s a positive for bonds, though giving current market positioning the upside might be limited. Tonight’s an early close in the US with US/UK/EMU markets closed tomorrow. On Monday, the US re‐opens though UK/EMU markets remain closed.

The German 10‐yr yield closed below the lower bound of the 1.5‐1.7% trading range (which is also 62% retracement from last year’s May‐ September up‐leg) for a second day yesterday. That’s a very important technical signal and further trading below would suggest the break is confirmed. Given special trading conditions today, we delay our judgment on the technical outlook till trading is up and running next week. A break opens the way for still lower yields. In the US, the 10‐yr yield tested the lower bound of the 2.6‐2.8% range (key support 2.45%), but (technically) more important is the 30‐yr yield. It fell below 3.5% key support (38% retracement) and could be the canary in the coalmine.