Wait-and-see ahead of Thursday’s ECB?
Rates
Weak US eco data have no lasting impact
Global core bond markets ended last week’s final trading session mixed. The US Note future managed to cling on to some of the intraday gains, while the Bund returned them all and even closed with small losses. The US Note future’s outperformance was related to the release of mostly disappointing US eco data (CPI inflation, retail sales, Michigan consumer confidence). A Reuters article citing sources that the ECB “is keen to keep its asset purchases open-ended” in order to remain flexible, didn’t draw much attention. US equities gradually rose into the US close (+0.5%; new record closing high S&P 500) and contributed to the intraday reversal on core bond markets. Chicago Fed Evans (voter) said that the current environment supports very gradual rate hikes (“2, 3 or even 4 rate hikes this year”) and slow predetermined reduction in the balance sheet.
At the end of the session, changes on the German yield curve ranged between +0.7 bps (5-yr) and -1.2 bps (30-yr). The US yield curve dropped up to 2.5 bps lower (5-yr) with an underperformance of the 30-yr yield (+0.3 bps). On intra-EMU bond markets, 10-yr yield spread changes versus Germany ended nearly unchanged with Portugal, Spain and Italy outperforming (-4/5 bps).
Thin eco calendar
Today’s eco calendar is uneventful with only final EMU CPI data and July US empire manufacturing. EMU inflation is expected to be confirmed at 1.3% Y/Y for the headline reading and 1.1% Y/Y for the core measure. We side with consensus after confirmations of national readings in Germany, France, Italy and Spain. The July US empire manufacturing is expected to decline from a near 3-yr high (19.8) to 15.0.
EMU bond supply rather low this week
This week’s scheduled EMU bond supply is rather thin with only Germany, France and Spain tapping the market. The German Finanzagentur kicks off on Wednesday with a €1B 30-yr Bund auction (2.5% Aug2046). The French Treasury auctions three OAT’s on Thursday (0% Feb2020, 0% May2022 and 2.25% Oct2022) for a combined €6.5-7.5B. Additionally, they aim to raise €1.25-1.75B via three inflation-linked OATi’s. The Spanish debt agency sells three on the run bonds: 3-yr Bono (0.05% Jan2021), 5-yr Bono (0.4% Apr2022) and 10-yr Obligacion (1.45% Oct2027). The amount on offer still needs to be announced.
Wait-and-see ahead of Thursday’s ECB?
Overnight, Asian stock markets eke out small gains with Japan closed (Marine Day) and Chinese equities underperforming despite better-than-expected eco data (Q2 GDP, retail sales, industrial production). The US Note future and Brent crude trade flat, suggesting a neutral opening for the Bund.
Today’s eco calendar only contains final EMU CPI data and US Empire Manufacturing sentiment. We don’t expect the data to impact trading. Q2 earnings reports could influence markets via risk sentiment. Overall, we expect trading to remain confined to tight ranges ahead of Thursday’s ECB meeting. Rumours could cause some volatility, but shouldn’t have a lasting impact. We don’t expect the ECB to change the wording of the statement while Draghi will have to explain his (hawkishly interpreted) Sintra comments in more detail. We think that an announcement on winding down asset purchases will only come in September, when a new inflation report is available.
From a technical point of view, the T-Note remained above the key 124-12/01+ support area while the German Bund fell below similar support at 161.68/58. Next support stands at 160.17. If broken, this could point to a full retracement towards 158.89. We hold our longer term sell-on-upticks strategy in both the Bund and US Note future as markets reposition for a new stage in the global monetary cycle: policy normalisation. The peak of central bank dovishness is behind us.
Author
KBC Market Research Desk
KBC Bank
