US Thanksgiving and EMU PMI business sentiment

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Central bank info and technicals trigger re-positioning

Attention turned to the shape of the curve lately, convincing traders to reposition. Technical considerations (US) and central bank info (ECB/Fed) also go some way to explain the moves. The German curve flattened with yields at the short end modestly higher and those at the longer end modestly lower. ECB Coeuré said that he expects "interest rate guidance to gain importance over time, up to a point where it would be possible to delink it from the end of net asset purchases". This suggests that the first rate hike might come faster than hitherto expected by many market participants. Both the short end and long end of the curve dipped lower, but only the short end stabilized near the lows. All in all, the move was technically insignificant.

US Treasuries showed a different and more outspoken intraday profile. US Treasuries slid marginally lower in response to the sharp drop of German bonds in the European morning session. However, US Treasuries caught a bid when US traders entered the fray. The move developed very gradually. Mixed US durable orders didn't really affect trading. Michigan consumer sentiment was strong, topping expectations, but inflation expectations sub-indices were a tad weaker. Finally the FOMC Minutes did little to dispel expectations for a Dec rate hike, but there were multiple, upped concerns about too low inflation, which might affect the Fed's policy in 2018. Treasuries extended gains after the release with the very long end lagging. We think that yesterday's price action was mainly driven by some profit taking on the breath-taking curve flattening and the considerable rise of US short term yields since early September.

In a daily perspective, the US yield curve bull steepened. US 2- and 5-yr yields dropped by 4.4 and 5.7 bps, while 10- and 30-yr yields fell 3.7 and 1.8 bps. The German curve flattened with yield changes ranging between +1.7 bps (2-yr) and -1.6 bps (30-yr).

US Thanksgiving and EMU PMI business sentiment

November EMU PMI business sentiment index is expected unchanged at 56, a level suggesting solid growth in activity. The manufacturing PMI is expected a tad weaker and services a tad stronger. Similarly, geographically, German PMI sentiment is expected marginally stronger and French PMI sentiment marginally weaker. An outcome in line with expectations suggests that Q4 growth evolves in line with Q3's 0.6% Q/Q, which would keep the Y/Y growth rate around 2.5%, well above potential. We prefer to side with consensus. The ECB account of the 26 October ECB meeting is interesting as the ECB took important decisions about the outlook for the APP bond buying programme. Since, indiscretions and speeches told us that opinions diverged inside the council. ECB board members Lautenschlaeger, Coeuré, Weidmann and Villeroy opposed the open-ended character of the prolongation. We hope to get more details about the debate inside the ECB .

Solely EMU to watch out for

Asian stock markets eke out small gains this morning with China underperforming (-1.5%) and Japan closed. The US Note future is slightly lower overnight. FOMC Minutes confirmed that the Fed will most likely raise rates in December, but that's already discounted. Brent crude is stable and we expect a neutral opening for the Bund.

Today's eco calendar focuses on EMU with US markets closed for Thanksgiving. EMU PMI's are expected to remain at very strong levels, which should be sufficient to inflict some losses on the Bund. Minutes of the ECB meeting will reveal more about the October decision to extend APP. Recently, several governors spread different opinions on their personal preference. Minutes might show how big the dispersion actually was. Correlations between bond markets and equity or oil markets was very loose of late, making it hard to predict the Bund's performance based on those markets. The German SPD seems to make an opening to extend Germany's grand coalition. If so, it could inflict more losses on the Bund.

Technically, US Treasuries will probably trade in the 124-06 to 125-25 range going forward. This corresponds with a 2.3%-2.47% band in yield terms. The trading range for the Bund going forward is between 160.24 and 163.43. Any moves towards the topsides of the ranges could be used to put up short positions.

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