Business sentiment day!

Rates

Core bonds mixed in yet another “wait and see” session

Global core bonds traded mixed in an uneventful session. In the US, the curve bear flattened with the 2-yr yield 1.2 bps higher and the 30-yr yield 2.5 bps lower. This smells like some modest positioning on expected Fed policy tightening. In the German Bund market, investors very modestly scaled back long positions ahead of the ECB and after a failed test of the highs in the Bund on Friday and on the back of moderate equity strength. German inflation, as expected, had no impact on trading and neither had a very weak Chicago PMI. German yields were unchanged at the 2-yr, up about 1 bp in the 5-to-10 yr area and 3 bps higher further out. This week’s back-loaded calendar keeps investors sidelined. On intra-EMU bond markets, 10-yr yield spreads changes versus Germany were minimal with a Greece underperformance (+19 bps) on news that hackers targeted Greek banks.

Business sentiment day!

Today the eco-calendar is somewhat more filled. In the US, there are the ISM manufacturing data and the Markit PMI Manufacturing survey. The ISM manufacturing data for November is expected to improve from 50.1 to 50.5. However, we feel that there are some downward risks in the manufacturing as the sector is still adjusting to slower global demand. The KBC Nowcast projection for the ISM is 49.8. In the eurozone, the Markit manufacturing PMI is expected to remain stable at 52.8 in November for the final reading. Here, we side with the market expectations. The euro area unemployment rate is expected to have stabilized at 10.8% in October, but the downward trend is intact. In the UK, manufacturing service confidence will be published and earlier this morning the Chinese PMi’s were mixed. The official measure fell slightly (to 49.6) while the Caixin measure slightly improved (to 48.6). So, overall it looks like the manufacturing sector has still difficulties at the global level, contrary to the services sector where sentiment improves.

Today: Weak ISM able to lift US Treasuries?

Overnight, most Asian stock markets trade positive with some indices gaining up to 2% with plenty of news. Chinese PMI’s were mixed (see higher). The IMF added the renminbi to its SDR basket, effective late 2016, Japanese capital spending was very strong in Q3 and the RBA kept policy unchanged. The US Note future is marginally lower overnight. If positive risk sentiment spills to Europe, it could weigh on the Bund in the opening.

Today, the eco calendar focusses on global manufacturing PMI’s (final EMU, UK and US ISM). We especially keep a close eye on the US gauge. We believe that risks are on the downside of expectations with even a chance of a sub-50 outcome (see above). That would be the first time since the end of 2012 and protect the intraday downside of US Treasuries ahead of Yellen’s speech (tomorrow) and the payrolls (Friday). Central bankers include Chicago Fed Evans and Washington-based governor Brainard. Both are dovish voices inside the FOMC and prefer to wait a bit longer. Therefore we look for signs that they nevertheless join the majority and endorse a small rate increase in December with the onus on the very gradual tightening cycle afterwards. In the US Treasury market, we hold our sell-on-upticks approach.

In Europe, we think that some scaling back of Bund long positions will be considered in the run-up to Thursday’s meeting given the very dovish positioning. The proximity of key resistance (158.60/78 for the Bund; 0.42% 10-yr yield) could trigger some correction as well.

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