German CPI and US Chicago PMI sole data of interest

Rates

New high for Bund in technical trading

Global core bonds traded with a slight upward bias in a technically‐inspired session. EC confidence data were mixed to slightly stronger than expected, but ignored. The Bund reached a new cycle high (158.78), but couldn’t sustain all of its gains, closing officially just 1 tick below the 158.60 previous high.
Volumes were lower than usual in the Bund contract and extremely low on the US Treasury market (Black Friday). In a daily perspective, the German yield curve barely shifted 0.2 bps (2‐yr) higher to 1 bp lower (10‐yr). Changes on the US yield curve ranged between ‐1.4 bps (10‐yr) and ‐2.7bps (3‐yr), the 3 to 7‐yr outperforming. The very long end lagged with 30‐yr US yields up a tiny 0.2 bps. On intra‐EMU bond markets, 10‐yr yield spreads versus Germany narrowed up to 3 bps (Portugal). The Italian BTP auction went well.

German CPI and US Chicago PMI sole data of interest

The eco calendar is thin and not very enticing for markets ahead of the ECB meeting on Thursday and the US payrolls and the OPEC meeting on Friday. In the US, the Chicago PMI is expected to decline from 56.2 to 54.0 while the Dallas Fed. Manufacturing index is expected to improve from ‐12.7 to ‐12.0. For both indicators, we see some downside risks as other regional business sentiment showed some negative momentum in November. In the EMU, German inflation data draw attention. Headline inflation is expected to pick up to 0.1% M/M and 0.3% Y/Y in November from 0.0% M/M, and 0.2% Y/Y in October. It shouldn’t affect the ECB decision anymore. We see no reasons to take distance from consensus. The IMF decides whether the Chinese Yuan will enter the SDR basket. Recent key voices from the IMF suggest that the Yuan will pass its exam. As such, the decision is not so important, but it is, of course, a highly symbolic gesture that gives the yuan international prestige and recognizes its increasingly important role in international trade and FX trading. It won’t immediately impact global core bonds. However, if the dollar (for other reasons) continues to appreciate, Chinese authorities might at some point be tempted to devalue the yuan to support Chinese growth. This could send deflationary impulses towards the global economy, favouring global bonds. However, it is way too early to speculate on it now.

Only Spanish and French auctions this week

This week’s EMU bond supply is low with only Spain and France tapping the market on Thursday. The French debt agency concludes this year’s issuance by tapping three off‐the‐run OAT’s (2.25% May2024, 4.75% Apr2035 & 4.5% Apr2041) for €3.5‐4.5B. The Spanish treasury sells the on the run 5‐yr Bono (1.15% Jul2020), 10‐yr Obligacion (2.15% Oct2025) and 15‐yr Obligacion (1.95% Jul2030). Today, the Treasury announces the intended volume. This week’s auctions will be supported by a €14.5B Italian redemption.

Today: Scaling back of long positions into ECB meeting?

Overnight, most Asian stock markets trade negative with volatile Chinese indices slightly underperforming. The US Note future trades with a marginal downward bias, but we expect a neutral opening for the Bund.

Today, the eco calendar contains German inflation data and US Chicago PMI. Ahead of Thursday’s ECB meeting, we don’t expect these figures to impact trading. We expect substantial policy easing, but bond markets are already quite dovish positioned. Therefore, we think that some scaling back of Bund long positions will be considered in the run‐up to Thursday’s meeting. The proximity of key resistance (158.60/78 for the Bund; 0.42% 10‐yr yield) could trigger some correction as well. In the US, Treasuries might take off with a slow start given the back‐loaded calendar (Yellen speech on Wednesday, payrolls on Friday). We hold our sell‐on‐upticks approach.

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