The focus will be on the German HICP inflation data for April

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Yesterday, global core bonds were in countdown mode ahead of this week’s key eco releases and the FOMC meeting. The eco calendar was thin, while some negative Ukraine headlines were shrugged off. Rumours about a big M&A deal supported at times equities and the inverse correlation with bonds was nearly perfect (see graph). Some observers mentioned curve repositioning ahead of the FOMC/payrolls as a driver. Whatever, the moves were technically irrelevant and occurred in rather thin flows. Both the German and US yield curves shifted higher and steepened. In the US yield increases varied from 0.2 to 4.3 bps, while in Germany yield changes were smaller (between 0.2 and 1.7 bps). On intra- EMU bond markets, Spanish bonds slightly outperformed on the back of Friday’s rating upgrade by Fitch (BBB to BBB+).

Today, the eco calendar heats up, especially in the euro zone with the European Commission’s confidence indicators, euro zone M3 money supply and the German HICP inflation. In the US, S&P CS house prices and Conference Board’s consumer confidence will be released and in the UK the first estimate of Q1 GDP will be published. On the supply front, Italy (CCTeu & BTP) will tap the market.

The focus will be on the German HICP inflation data for April. The consensus is looking for a pick-up from 0.9% Y/Y to 1.3% Y/Y, mainly due to positive base effects (late Easter) following a significant drop in German HICP inflation last year in April. Given the ECB’s unease with the low inflation, if the actual increase would fall short of the consensus, the risks for a short-term rate cut will increase, certainly if HICP would only rise to 1.1% Y/Y or lower. In case consensus is confirmed or inflation exceeds consensus (our risk assessment), May rate cut expectations should fade, which should have some impact on the shortest money market rates. See also impact ECB tenders below. European Commission’s economic confidence is forecast to have extended its rebound in April, rising from 102.4 to 102.9 in April. According to the first estimate, consumer confidence improved already further this month and we see also risks for an upward surprise in economic confidence, especially after stronger PMI’s and a more robust IFO. M3 money supply is forecast to show a cautious increase in March, from 1.3% Y/Y to 1.4% Y/Y. More important are however the lending data. Over the previous months, there were very cautious signs of improvement in loans to households, although there are no signs yet of a sustainable improvement. Lending to non-financials, on the contrary, remains really depressed. Usually, lending to non-financials starts to recover about three quarters after growth turned positive, but for now there are no signs yet, which indicates that the recovery is weak and fragile. Finally in the US, we expect Conference Board’s consumer sentiment will improve more than expected.

The Italian treasury issues a new 5-yr CCTeu (€1.75-2.5B May2019; floating rate note). Furthermore, it taps the on the run 5-yr BTP (€2.75-3.5B 2.50% May2019) and the on the run 10-yr BTP (€2.5-3B 3.75% Sep2024). In the run-up to the auction, both BTP’s cheapened 7 to 9 bps in ASW spread terms. Sentiment versus periphery remains very strong and supportive for the auction.
In that respect, the pick-up over Spain could be interesting as well. In ASW spread terms, the 5-yr Italian sector currently gives a 14 bps (!) pick-up over Spain. At the 10-yr tenor it’s 8 bps. This week’s auctions will be supported by a €15.44B 3-yr Bono redemption.

The ECB conducts its weekly MRO tender and SMP sterilisation operation. For the 7-day MRO, €121.8B matures. Given the recent spike in eonia rates (1 day: 39 bps; 1 week 28.5 bps), we expect a larger take-up. Also because the autonomous factors are thought to be some €30B higher than last week. On top, excess liquidity declined to only €86B this week, the lowest amount since 2011.
The combination of these factors doesn’t bode well for the sterilization operation, which already failed the past two weeks. Tonight we’ll comment on the outcome of the operations. Tomorrow, there is still a 3-month LTRO (€4.96B maturing).

Overnight, most Asian equity indices trade negative despite WS’s positive close. Japanese markets are closed for Showa Day, which marks the start of the Golden Week. The US Note future trades flat overnight.

Today, the eco calendar contains EC confidence indicators, UK Q1 GDP and US Consumer confidence. However, the one thing everyone will be waiting for are the German inflation releases. A rebound because of Easter is expected but we even expect an above-consensus outcome. That should put pressure off the ECB to ease policy further. Overnight, press reports also quote a German lawmaker who said that Draghi told parliamentarians that the ECB is still far from engaging in large-scale bond purchases. Higher inflation and (to a lesser extent) the comments are a negative for the Bund and should push the German 10-yr yield away and above the 1.50% support. Higher inflation could also push the euribor strip curve higher with a steepening of that curve. Finally, risk sentiment on equity markets is also a force for bond markets (see yesterday’s correlation). In that respect, we closely look to the situation in Ukraine.