The FOMC concludes its two‐day meeting with a statement

Rates

Global core bond trading happened in rather small ranges, but price action was interesting though. The Bund showed willingness to react on German inflation numbers. It sold off ahead of the release, but swiftly recouped lost ground when the overall German HICP didn’t confirm expectations for a rebound to 1.3% Y/Y, as it printed only at 1.1% Y/Y. Earlier the ECB liquidity tenders showed banks asking for a lot of extra liquidity which will push excess liquidity higher and eonia again lower, following a sharp run‐up in the past week (see our Sunset report). The combination with the lower inflation figure boosted the short end of the Bund curve and the money market curve. The latter shifted somewhat lower and kept its inverse slope, keeping the possibility of a rate cut open. In Germany, yield changes varied between ‐2.7 bps (2‐yr) and + 1.4 bps (30‐yr). In the US, US Treasury yields ended within 1 bps from the previous close in an uneventful session.

Today, the eco calendar remains well‐filled (see calendar). In March, euro zone HICP inflation surprised on the downside of expectations, falling to 0.5% Y/Y, due to negative base effects. The euro zone HICP inflation for April is expected to show an uptick to 0.8% Y/Y, reversing the previous month’s drop. We believe that the risks are for a downward surprise, especially after yesterday’s German and Belgian inflation data (see our Sunset report of 29 April). In the US, growth is forecast to have slowed significantly at the start of the year due to poor weather conditions. Expectations are for an annualized growth rate of 1.2% Q/Q, down from 2.6% Q/Q (annualized) in Q4. Growth in personal consumption is expected to have slowed, while both residential and non‐residential investments are forecast to contribute only marginally to growth. Growth will however be partly offset by a drag from inventories and net‐exports. We believe that the risks might be for a somewhat stronger outcome. Finally in the US, the ADP employment report will be interesting ahead of Friday’s payrolls. In April, weather conditions fully normalized. It will therefore be interesting to see whether there is some delayed hiring in April. The consensus is looking for an increase in private sector hiring by 210 000, slightly up from the 191 000 in March. Although the consensus for the ADP report is already high, we believe that a stronger outcome is not excluded.

The FOMC concludes its two‐day meeting with a statement. There will be another $10B taper, lowering the pace of monthly purchases to $45B. Economic data have been sufficiently strong to continue QE tapering according to plan. We don’t expect the FOMC to make other changes to its policy stance. The FOMC will probably debate on how to conduct policy further out. The low inflation will be one source of uncertainty that will get attention, as will the size of slack in the economy. Besides these, there are the preparations ahead of the first rate hike. How will the Fed absorb the excess liquidity, which is needed to make sure that rate increases are translated in higher market rates? Of course, there is no urgency in coming to decisions on these points, but they need to be prepared. There are no new economic projections and no post‐meeting press conference , which suggests that no big news is expected from this week’s meeting. We probably will have to wait for the Minutes, to be released in two weeks’ time, to get a take on the direction of the discussions.

The French debt agency concludes this week’s scheduled EMU bond auctions by launching a new 15‐yr OAT (2.50% May2030) and tapping the on the run 10‐ yr OAT (2.25% May2024) for a combined €7‐8B. On the grey market, the new 15‐yr OAT trades with a 6.5 bps pick‐up in ASW spreads compared with the previous Oct2027 benchmark. This reflects a 24 bps pick‐up in yield terms. The 10‐yr OAT cheapened some 3 bps in the run‐up to the auction and trades normal on the 10‐yr segment of the French curve. Overall, we expect decent demand as usual. France currently completed around 40% of this year’s expected issuance.

Overnight, most Asian equity indices trade positive (China underperforming) though the gains are meagre compared to (especially) Europe and the US yesterday. The BoJ kept its monetary policy unchanged, thus refraining from additional easing for now. Several Japanese eco data were released and overall disappointed. The US Note future trades flat.

Today, the eco calendar is interesting. In EMU, we get the April inflation number. Following the German outcome yesterday, risks are for a lower than expected rebound. Nevertheless, we don’t think the Bund will profit much in such scenario (e.g. 0.7% y/y versus 0.8% y/y expected). A second item to look out for is the Bank Lending Survey. If the ECB’s survey confirms yesterday’s bleak picture from M3 money and lending data, the ECB could feel extra need to fix the troubled bank lending channel. In the US, we get ADP‐report, Q1 GDP data and Chicago PMI. After European closure, the FOMC announces its policy decisions. We expect better data and the Fed to continue its gradual tapering process. These elements are negative for core bonds and (the data) raise expectations ahead of Friday’s payrolls. Finally, potential tensions in Ukraine cannot be ruled out as a wildcard via sentiment on equity markets. Technically, the picture of the German 10‐yr yield remains very fragile. The 10‐yr yield still hovers around 1.50% but we don’t expect a clean break lower.