Asian equities trade mixed with a Japanese underperformance

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Yesterday, core bond markets ended marginally higher ahead of the US long weekend (Thanksgiving and Black Friday). US eco data triggered a (small) move higher. A plain vanilla $29B 7-yr Note auction (see below) didn’t impact trading. At the end of the day, US yields were 0.4 bps (2-yr) to 1.2 bps (10-yr) lower. Both the 10-yr and 30-yr yields remain below important technical levels (2.27% & 3% respectively). The US 5-yr yield tested similar support at 1.55%. In Germany, yield changes were limited between -0.5 bps (2-yr) and -2.8 bps (30-yr). On intra-EMU bond markets, 10-yr yield spreads versus Germany widened up to 7 bps in the PIIGS with a Greek underperformance (+31 bps). The troika and Greek officials are negotiating in Paris on the future of the bailout package. Currently, it seems that they will agree to a 6-month extension.

Today, the focus will be on Europe as US markets are closed in observance of Thanksgiving. The first estimate of German HICP inflation for November will be released, together with Spanish and Belgian inflation, German unemployment data and euro zone M3 money supply and European Commission’s consumer confidence. The OPEC will meet in Vienna and ECB’s Draghi, Constancio and Weidmann are scheduled to speak.

The preliminary estimate of German HICP inflation for November is forecast to show a further slowdown in the annual rate of inflation from 0.7% Y/Y to 0.5% Y/Y. On a monthly basis, consumer prices are forecast to come out flat. If confirmed, this would be the lowest level for German inflation since early 2010. We believe that the risks, if there are any, might be for a downward surprise.
Ahead of the national reading, the regional figures will already give an indication. Also in Spain, inflation is forecast to have dropped in November, from -0.2% Y/Y to -0.3% Y/Y. German unemployment is expected to have dropped marginally in November (by -1 000) following a 22 000 decline in October. In the euro zone, M3 money supply is forecast to have picked up further in October, from 2.5% Y/Y 2.6% Y/Y. Recently, there were cautious signs of improvement in lending. It will be interesting to see whether lending picked up further after the completion of the AQR and stress tests of the banking sector. Nevertheless, we expect any improvement to be very gradual. Confidence indicators in the euro area have been very volatile over recent months. Economic confidence is forecast to have weakened slightly in November, from 100.7 to 100.3, following an uptick in October. As consumer confidence weakened and also the PMI’s were poor, we believe that also economic confidence might disappoint.

The Italian treasury concludes this week’s scheduled supply with the launch of a new 5-yr BTP (€3-3.5B 1.05% Dec2019) and a tap of the on the run 10-yr BTP (€1.5-2B 2.5% Dec2024). Grey market trading indicates that the new 5-yr BTP offers no pick-up in ASW spread terms compared to the previous Aug2019 benchmark (both ASW + 59 bps). In yield terms it offers a 2.5 bps pick-up though. This valuation is rather rich. The Dec2024 BTP cheapened marginally going into the auction is also rich at the 10-yr sector of the Italian curve. These factors are not supportive for demand but will likely be overshadowed by strong peripheral sentiment (prospect ECB buying) and the pick-up of Italian bonds over Spain. In the US, the treasury concluded this week’s refinancing operation with a reasonably well $29B 7-yr Note auction. The auction stopped a tad above the 1:00 PM bid side but the bid cover was marginally stronger than this year’s average (2.63 vs 2.57). The bidding details were mixed, with a strong Indirect bid but a weak Direct bid. The size of the Dealer bid was much improved though.

Overnight, Asian equities trade mixed with a Japanese underperformance. The PBOC scrapped its repo saes for the first time since July, loosening monetary policy further. Chinese indices gain 0.5%. US markets are closed today because of Thanksgiving holiday.

Today’s focus is thus on Europe. German inflation data are the main release but even in case of a weaker outcome, we think that the scope for any market reaction in the Bund is small after extremely dovish ECB comments recently (Draghi, Constancio, Nowotny,…). On top, the German yield curve trades already close to all time record lows. A test is likely, but we don’t expect a break. ECB speakers include Draghi, Constancio and Weidmann. Especially the latter’s comments could be interesting against the background of the dovish ECB rhetoric.

The FOMC changed its forward guidance to include the data-dependence of the lift-off date. We argued that US Treasuries would become more sensitive to US eco data. Since that meeting, US rates were relatively stable in a thin sideways range. Wednesday’s technical breaks on the downside (in yield terms), despite stronger US eco data the past month, are an important warning signal. Is it because markets doubt the Fed? Or because they fear a that disinflation will transit to the US? Or because investors find the yield pick-up at the long end of the US curve attractive in the current environment? Whatever the reason, a confirmed break below 1.55% (5-yr), 2.27% (10-yr) and 3% (30-yr) would suggest that yields could drop further short term even though it feels completely unnatural given the Fed’s stance and eco data strength. The US Note future broke above 127-00+, opening the path to the contract high?! (130-17)