No June Fed hike, but meeting-by-meeting assessment

Rates

Yesterday, core bonds had a choppy session within the existing ranges. The main event was the FOMC Minutes that hadn’t a major impact on markets, even if it allowed the US Treasuries to eke out modest gains, following sharp losses on Monday/Tuesday. US yields were down up to 4.5 basis points, the belly outperforming. The dollar kept its gains and equities ended little changed. Intra-day moves were rather small, except for the dollar. The Bund, which outperformed US Treasuries in past days, now underperformed. The German curve bear steepened with yields up to 4.5 bps higher. Greek concerns in an overall dull European trading may have been responsible for a marginal spread widening.. The ongoing different path between Bunds and US Treasuries is worth noting.

Fed bit concerned about weak consumer spending

The Minutes of the April 2015 FOMC suggest that it is unlikely the lift-off will take place at the June meeting, especially due to concerns about growth and in particular consumer spending. Many participants thought it unlikely that the data available in June would provide sufficient confirmation that the conditions for raising the target range of the federal funds rate had been satisfied.”. “A few members anticipated the economy would be ready for a June lift-off.” Such a lift-off was though not entirely ruled out. According to the Minutes, moderate growth is expected to resume, but concerns were highlighted that the stronger dollar and lower oil prices could prove to be lasting headwinds. The FOMC decided to make its minds up meeting by meeting and rejected the idea of giving guidance about when a rate increase would be likely. Besides the growth uncertainty, policymakers were also worried that the lift-off could trigger a sharp rise in yields, confirming the need of careful communication on the timing. They expressed also the fear of greater bond price volatility than previously due to the role high-frequency traders, decreased inventories of bonds held by broker-dealers and elevated assets of bond funds. On inflation, many participants noted that measures of inflation averaged over several months continued to run below the long-run objective (2%). Short term this was expected to continue, but over the medium term the governors still expected a return to the long run objective, as transitory effects dissipated. There was much discussion about the value of the long term equilibrium Fed fund rate, but no conclusions were reached. Conclusion, The Minutes will soon be forgotten and attention will focus on growth, inflation and Greece.

Busy market calendar today

The ECB will release the minutes of its latest policy meeting and the EU Summit will start in Riga. We don’t expect much from the ECB Minutes,. While the EU Summit is devoted to the relations between the EU and the eastern partners, Greece may be touched informally. Spain, France and the US will tap the market and Fed’s Fischer is scheduled to speak. We expect the auctions to go well.

The euro zone PMI’s are forecast to have weakened slightly further in May following a similar drop in April. The manufacturing PMI is expected to drop from 52.0 to 51.8 and the services PMI is forecast to decline from 54.1 to 53.9. Last month, weakness was mainly based in the core countries, while sentiment improved further in the hard-hit Southern EMU countries. This trend is expected to have continued in May.
We believe that the risks remain for a downward surprise, especially in the manufacturing sector. Consumer confidence is expected to have dropped for a second straight month in May too. We believe that the risks are for an upward surprise. In the US, the Philly Fed index is expected to show a marginal improvement in May, from 7.5 to 8, following a limited improvement in April. Better weather conditions might support sentiment, although the strong dollar and sluggish global demand will probably continue to weigh. Still, we believe that the risks are for a somewhat bigger rebound. Also existing home sales might be interesting following strong housing data earlier in the week. Better weather probably continued to support sales together with the start of the spring selling season and therefore we see again upside risks. Jobless claims are forecast to have increased slightly. In the previous weeks, claims continued to surprise on the downside, which might remain the case this week.

Today: Some upward pressure on yields, but no break

Overnight, Asian stock markets trade mixed with Chinese equities still sharply outperforming, despite unconvincing PMI. Other indices trade flat (Japan despite stronger PMI) to lower. The dollar was weaker in early Asian trade, but is recouping its losses. The US Note future is nearly unchanged and the Bund opened somewhat higher, maybe some catching up on US Treasuries or on Schaueble’s comments that a Greek default is not excluded, something he already said before.
Today, the eco calendar is busy. We see downside risks to EMU PMI’s, but upside risks for EMU consumer confidence and all US eco ,data. So, we might see early gains under pressure later in the session. We look closely whether Coeuré’s comments on upped bond buying will affect the Spanish and French auctions. The EU Summit starts only after the European closure. The Bund stabilized in recent sessions following the sell-off, but there is no firm signal that the sell-off is over yet. A move above 154.97 (38% retracement) would make the picture more bullish, but seems today out of reach if the eco data are indeed better than expected. The downside looks protected too with the 151.44 sell-off low as line in the sand. So, more consolidation is our favourite for today. An agreement with Greece (not expected today) could send the Bund for a renewed test of the sell-off low.
In yield terms, the US 10-yr yield tested this year’s high at 2.30% (neckline huge double bottom; targets are 2.78% & 2.97% i.e. full retracement from decline since 2014). A sustained break didn’t happen, but Tuesday’s sell-off suggest the risks for a break have not yet gone away. We suspect a 2-to-2.30% broad range will reign for now.