US housing data and Beige book for release
Rates
US & UK CPI's don't impact bonds, which end higher
Yesterday, UK and US inflation readings didn't bring the expected fireworks on core bond markets. Going into the European closure, core bonds edged higher to close with modest gains in technically inspired trading (failed tests key support Bund & US Note future earlier this week). European and US equity markets recorded nice gains (strong earnings from Goldman, J&J,...), but core bonds didn't suffer via the "traditional" risk on/risk off paradigm. Without eco data on the EMU calendar, Bund trading will probably remain confined to a tight range in the run-up to Thursday's ECB meeting. The ECB's bank lending survey showed that EMU banks kept credit conditions for companies stable in Q3 and improved those for households. The US NAHB housing sentiment eased slightly to a still very strong 63 reading, but it had no impact on trading. In a daily perspective, the German yield curve bull flattened with yields 1.1 bp (2-yr) to 2 bps (30-yr) lower. US yields declined by 1 bp (30-yr) to 2.3 bps (5-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany ended nearly unchanged.
The Minutes of the Sep Fed discount rate meeting showed that 9 of the 12 regional Fed banks sought an increase of the discount rate, but the Board decided to keep the rate at 1%. Only NY (Dudley), Minneapolis (Kaskhari) and Chicago (Evans) asked no rate change. It shows how close the decision at the September FOMC meeting was with the board governors (5 voters) and 3 regional Fed governors (1 voter) standing against 9 regional governors (3 voters).
US housing data and Beige book for release
Today, there are again no euro area data of importance. In the US, the September housing starts and permits are expected to have risen by respectively by 2.9% M/M and 0.9% by M/M, following a decline in August by 5.8% M/M and 0.4% M/M. The trend in starts is still up and an outcome in line with expectations would keep starts near the cyclical high. Permits are flattening out at decent levels. Given the past month's decline and adverse weather in the South in August, there might be some upside risks. However, starts and permits are quite volatile making any single surprise of little importance in the broader picture. The Fed's Beige Book is a preparatory document for the November 1-2 FOMC meeting. It describes the economy via anecdotal evidence from the various regional Fed banks. We don't expect the book to spur surprises. It should be close to the published hard and survey data.
German 30-yr Bund auction
The German Finanzagentur taps the on the run 30-yr Bund (€1B 2.5% Aug2046). Total bids averaged only €1.32B at the previous four 30-yr Bund auctions. The Bund cheapened in ASW spread terms going into the auction and trades normal at the very long end of the German yield curve. We fear that the recent surge in yields will only attract a limited amount of additional buyers so demand might remain lacklustre.
Range-trading ahead of US Debate/ECB meeting
Overnight, Asian stock markets trade mixed after WS's strong performance yesterday. Chinese eco data (Q3 GDP, industrial production, retail sales) printed in line with expectations and had no influence. Brent crude and the US Note future also show little signs of life, suggesting a neutral opening for the Bund.
Today's eco calendar contains only contains second tier eco data (US building permits and housing starts). Fed governors Williams and Kaplan speak, but they already gave their vocal support for a rate increase this year. The final US presidential debate (tonight) and the ECB meeting (tomorrow) will likely dominate headlines. We favour range-bound trading action in core bonds. Technical support levels in the Bund (163) and US Note future (129-26) held earlier this week and shouldn't be in danger today.
In yield terms, the US 10-yr yield (1.75%) and 30-yr yield (2.5%) broke above important resistance levels last week. We are currently testing those levels again, but from a support point of view. If we manage to stay above them, it would send an important technical signal that (long term US yields could rise further).
Author
KBC Market Research Desk
KBC Bank
