EMU bond supply heats up after Summer recess

Rates

Fed keeps door for September hike open

On Friday, global bonds closed the week with a quiet session. Month-end extension buying and the long weekend (UK is closed today) attracted buyers at the longer end, while steeply higher oil prices (Brent hit $50/ barrel) and reasonably strong US eco data weighed on the shorter end. In a daily perspective, US yields were up by 2.5 and 1.3 bps at the 2- and 5-yr tenors while down 0.2 and 1.2 bps at the 10 and 30-yr tenors. In Germany yields were up by 1.4 to 2.3 bps in the 2-to-10-yr part of the curve (steeper) and down 0.2 bps at the 30-year. Movements in the intra-EMU markets were small. US equities ended an uneventful session narrowly mixed. Interviews given by Fed Bullard and Mester were hawkish while Fed Kocherlakota was again very dovish. (see Friday’s Sunset). Vice Fed chairman Fischer spoke slightly hawkish, which was confirmed by his speech on Saturday. All in all market reactions on these interviews were small, but could help explain the small losses at the shorter end.

Fed vice chairman Fischer said he didn’t know whether a lift off in September had become more or less compelling than a few weeks ago. He did however keep the door for a September move open. His positive view on the economic outlook and his statement that the current very low inflation is due to transitory factors, point to a possible lift-off in September. He questioned the message coming from the decline in market inflation expectations as these could have been due to technical factors. Eye-catching too was Fischer’s stress on the need for the Fed to act and raise rates well before inflation might become a problem. Also ECB and BOE speakers thought that inflation would start moving gradually toward the inflation targets. If the calm remains on markets in the next three weeks and this week’s eco data remain strong, chances for a lift-off at the September 16-17 meeting would be more than even. Some observers suggest the Fed may wait till the October meeting before deciding and announce already that a press conference will be scheduled after that meeting.

Today, the eco calendar contains the first estimate of EMU inflation for August and the Chicago PMI. Following a stabilization in July, EMU inflation is expected to have eased slightly in August. The consensus is looking for a slowdown from 0.2% Y/Y to 0.1% Y/Y. On Friday, German inflation stayed unchanged at 0.1% Y/Y and Belgian inflation picked up to 0.9% Y/Y, while Spanish inflation surprised on the downside, easing to -0.5% Y/Y from 0.0% Y/Y. Lower prices for energy will probably be offset by higher prices for leisure & entertainment and clothing & footwear. Overall however, we believe that there are limited upside risks to the market consensus. In the US, the Chicago PMI has been very volatile recently. After a strong rebound in July, from 49.4 to 54.7, a stabilisation is expected for August, but we believe that the risks are for a limited payback following mixed regional indicators released earlier in the month.

EMU bond supply heats up after Summer recess

This week’s EMU bond supply comes from Austria (Tuesday), Germany (Wednesday), Spain & France (both on Thursday). The Austrian debt agency taps the off the run RAGB (3.9% Jul2020) and the on the run RAGB (1.2% Oct2025) for a combined €1.43B. The German Finanzagentur sells the on the run 5-yr Bobl (0.25% Oct2020) for €4B. The French treasury taps two OAT’s (1.75% May2023 & 2.5% May2030) and launches a new 10-yr OAT (1% Nov2025) for a combined €7.5-8.5B. Finally, the Spanish debt agency auctions the on the run 5-yr (1.15% Jul2020), 10-yr (2.15% Oct2025) and 30-yr Obligacion (5.15% Oct2044). This week’s auction will be supported by a €10B Italian redemption.

Today: Risk sentiment wildcard for trading

Overnight, Asian stock markets trade volatile but mostly with losses. China underperforms (-2.5%). Yesterday, the FT reported that Chinese authorities signalled to stop interventions on the stock market while stepping up efforts to find and punish those suspected of “destabilising the market”. This morning however, Bloomberg reports the exact opposite. The news agency indicates that the Chinese regulator intends to increase support to the stock market. All in all, an opaque situation which hurts risk sentiment and raises volatility. The US Note future opened lower this morning (on Fischer comments, see above), but erased all gains by the time of the European opening.

Today, the eco calendar contains EMU CPI and Chicago PMI. Outcome of the data risks being mixed for markets (see above). UK markets are closed for a bank holiday, which means traded volumes will be low. Ahead of key US eco data (ISM, ADP, payrolls), and the ECB meeting, this generally sets the stage for a quiet trading session. Today, risk sentiment on equity markets is a wildcard to this scenario given overnight swings and losses on Asian markets. Negative risk sentiment in Europe/US is a positive for core bonds though we note that last week’s safe haven flows were only meagre. Therefore, we expect the recent highs in the Bund (156.49) and US Note future (129-10+, Dec. Contract!!) to hold, even if equity and/or commodity markets suffer. Return action could be an opportunity to start a cautious sell-on-upticks strategy.