US consumer confidence & Draghi/Yellen wildcards

Rates

US yield curves little changed at openings session

Global core bond markets closed the first session of the fresh trading week like it ended last week: without significant yield changes. The intraday up-legs in the German Bund and US Note future, which were largely erased by the end of the session, didn't occur in sync. The Bund shot higher around European noon without real driver. End-of-month/end-of-quarter extension buying was perhaps already at play. Earlier on the day, investors ignored the strongest German IFO-reading on record. The up-leg of the US Note future was clearly attributable to disappointing May US durable goods orders, a significant gauge for business investment. The US 2-yr Note auction went well, but without impact on overall markets. In a daily perspective, US yields ended less than 1 bp off opening levels with the 30-yr marginally outperforming (-1.8 bps). German yields also closed within 1 bp of opening levels except for the 30-yr (-1.7 bps). On intra-EMU bond markets, 10-yr yield spread changes versus Germany ranged between -2 bps (Italy) and +1 bp. Italian assets welcomed the government's plans to bail-out two regional lenders positively.

US consumer confidence & Draghi/Yellen wildcards

US house prices and the Richmond manufacturing index (which is expected to rise moderately) are no market movers. Following a weaker June Michigan consumer sentiment (near record highs), the Conference Board measure of consumer confidence might be lower too than in May. However, the decline should be modest as it is more linked with the labour market. Fed governors Williams, Harker and Kashkari spoke already last week and shouldn't bring new info. Fed chairwoman Yellen speaks in London with Mr. Stern, president of the British Academy, on global economic issues. It would surprise us if she tackles market-sensitive issues so short after the FOMC meeting. The format - Q&A session without text - points to a conversation on global issues. It is a wildcard though. ECB president Draghi gives an introduction at the Sintra conference on investment and growth. It is potentially important, but it doesn't look the moment to stir the markets, as the June ECB meeting cleared the way for a quiet Summer.

German, US and Italy tap market

Germany and Italy start this week's EMU bond supply, respectively with a 2-yr Schatz auction (€4B 0% Jun2019) and zero-coupon & inflation-linked bonds. Total bids at the previous 4 Schatz auctions averaged €4.73B. Today's auction yield will probably be the highest since 2016. The Bund cheapened somewhat in ASW spread terms going into the auction, but and it looks rather good compared to surrounding bonds on the German yield curve. We expect plain vanilla demand. The US Treasury started its end-of-month refinancing operation with a strong $26B 2-yr Note auction. The auction stopped firmly through the 1:00 PM bid side, with the strongest bid cover (3.03) since November 2015. Bidding details showed a huge indirect bid, a better-than-average direct bid and a small dealer bid. Today, the US Treasury continues with a $34B 5-yr Note auction.
Currently, the WI trades around 0.975%.

More of the same or surprise from Yellen?

Overnight, Asian stock markets trade mixed in line with WS which closed flat to slightly lower after a stronger opening. The US Note future and Brent crude have no bias, while news flow is thin. We expect a neutral opening for the Bund.

Today's eco calendar contains some US eco data. Risks for consumer confidence are on the downside of expectations, but the main event/wildcard is Fed chairwoman Yellen's speech. It's uncertain whether or not she'll touch on monetary policy. If so, it will be interesting to see whether she holds on to the FOMC's communication line from the June statement, downplaying the recent setback in eco data. We think she will do so given the relatively low amount of eco data published since. That should prevent more US Treasuries gains ahead of Friday's inflation readings and next week's key releases (ISM, ADP, payrolls). The impact from this week's US supply operation (normally negative US Treasuries) could be balance by technical end-of-month and end-of-quarter buying. We hold our neutral bias.

Technically, we closely monitor the German 2-yr yield which tested important resistance (-0.63%/-0.60%). US yields are above (5yr), near (10y) and below (30y) key support levels even as the Fed held on to the blueprint of its future tightening cycle last week. Our basis assumption remains that the long term rally of core bonds is over as policy normalisation slowly starts (ECB) or accelerates (Fed).

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