KBC Market Research Desk
KBC Bank
Core bonds eked out some more gains yesterday with US Treasuries outperforming German Bunds after US President Trump sacked Secretary of State Tillerson. It’s the second dismissal in short succession of a more moderate profile in the US government following economic advisor Gary Cohn. The latest (negative) US political surprise overshadowed US CPI data. Inflation was in line with forecasts, rising from 2.1% Y/Y to 2.2% Y/Y. Risk sentiment on European and US stock markets gradually deteriorated, creating additional safe haven flows. The US yield curve bull flattened in a daily perspective with a solid 30-yr Bond auction contributing to the curve move. Yields declined by 0.7 bps (2-yr) to 3.1 bps (30-yr). German yields dropped 0.2 bps (30-yr) to 1.3 bps (10-yr) with the 10-yr yield testing 0.62% support again. 10-yr yield spread changes versus Germany ended virtually unchanged.
The US Note future continues trading with a small upward bias overnight even if damage on Asian stock markets remains limited, partly supported by constructive Chinese eco data. We expect a neutral opening for the Bund.
Today’s eco calendar is interesting with US retail sales & PPI data and several ECB governors speaking. The bar for US eco data seems rather low, but we don’t think that investors are willing to set up new short positions ahead of next week’s Fed meeting given the increased uncertainty created by US President Trump’s policy. At best, those two factors could cancel each other out. ECB heavyweights Draghi, Constancio and Praet are all scheduled to speak. We’re eager to find out whether they confirm/deny last week’s rumours about tapering asset purchases in Q4 2018 before the rate lift-off at the end of Q2 2019. Comments by ECB Smets and Coeuré earlier this week suggest a rather dovish bias, which could trigger another test of 0.62% support in the German 10-yr yield.
Technically, the trading band for the US 10-yr yield is 2.64%-3.05%. Short term, we expect a test of 2.8% intermediate support. The German 10-yr yield’s trading band is 0.62%-1.06%. The downside survived on two separate occasions last week, including after the dovish interpreted ECB meeting. That strengthens the support and our belief in setting up short Bund positions around this level.
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.
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