Asian equity markets trade

Rates

Yesterday, global core bonds traded quietly until geopolitical tensions threw a monkey wrench in the works. EMU eco data, reported ahead of the escalation of the Russian/Ukrainian conflict, couldn’t drive the market. August German inflation was spot on expectations and stable versus July, while August EMU economic confidence was very weak, but in line with earlier reported PMI’s. M3 data for July showed a cautious rise in money supply and a stabilization (at low levels) of lending. Following a spike to new contract highs, the Bund settled in a tight range near the highs. On a daily basis, the bull flattening of the German/US yield curves continued unabated. The 30-yr bonds outperformed with yields dropping another 4bps. Adopting to a new normal, i.e. a global deflationary environment? On intra-EMU bond markets, there was finally corrective action. Peripheral 10-yr yield spreads versus Germany added 5 (Ireland) to 17 bps (Portugal).

US Treasuries showed a similar picture as Bunds. A spike higher on the escalation of the conflict in Ukraine, followed by sideways trading. Strong GDP and claims data were unable to push Treasuries down. Gains were modest with yields up to 2.5 bps (30-yr) lower. The 7-yr Note auction was solid, but without much consequences for the overall market.

Today, the eco calendar is again well-filled with the inflation data and the unemployment rate in the euro zone and personal income & spending, the Chicago PMI and Michigan consumer confidence in the US. EU General Affairs Ministers meet and the ECB will announce the amount of LTRO repayments.

In the euro area, CPI inflation is forecast to extend its downtrend in August falling to 0.3% Y/Y from 0.4% Y/Y in July. Yesterday, German inflation data showed a stabilisation at 0.8% Y/Y in August, while Belgian and Spanish inflation continued to slow. We side with consensus as lower food and energy prices will probably continue to push inflation lower. The unemployment rate is forecast to stabilise at 11.5%. Recently, the unemployment rate dropped slightly further and we believe that the risks might be for another downward surprise. In the US, growth in both personal income and spending are forecast to have slowed in July. Personal income is forecast to have increased by 0.3% in July, while spending is expected to show a more limited increase by 0.2%. The Chicago PMI is forecast to pick up from 52.6 to 56.5 following a sharp drop in July. We hope to see a somewhat bigger rebound. Finally, the first estimate of August Michigan consumer confidence is expected to be revised upwards to 80 from 79.2, as Bloomberg consumer sentiment and the Conference Board’s index improved recently.

This morning, Eonia fixed negative for the first time ever (-0.004 bps). It had been coming for a while. After the ECB’s easing package in June, eonia permanently fixed below 0.05 bps (apart from ultimo’s). Furthermore, the eonia forward curve indicates even lower levels given the increased likelihood of more ECB action to come.

Overnight, Asian equity markets trade with small losses with China outperforming. Japanese stocks suffer from weak eco data (IP, consumption & retail sales disappoint). The US Note future is stable overnight.

Today, the EMU calendar contains the August CPI number. We side with consensus and expect a drop to 0.3% y/y, a 4-yr low. This could amplify dovish expectations in the run-up to next week’s ECB meeting (Sep 04). Especially since the speech of ECB Draghi at the Jackson Hole meeting (last Friday) made clear that the likelihood of ECB (ABS) QE increases. This boosted bonds further with consecutive lows for the German 10-yr yield (<0.87%). While we don’t prefer to buy Bunds at such lofty levels, the uptrend (in price terms) remains intact. Technically, the Bund is in oversold conditions though, which increases chances of a buy-the-rumour, sell-the-fact reaction (after the inflation data) or of disappointment after the ECB meeting (if the ECB doesn’t live up to high expectations), but for now geopolitical tensions should protect the downside in core bonds.

In the US, eco data are interesting today (cf. higher). Of late, stronger eco data didn’t stop the very long end of the US curve from rallying. While month end buying and geopolitical tensions are a reasonable explanation for the rally this week, we think the US economic recovery and the Fed’s mindset on normalization suggest the rally cannot go too far anymore. We closely monitor this evolution before drawing firm conclusions. Positioning into the long weekend with increased geopolitical tensions should normally be supportive for bonds today.