Core bonds had a rather dull trading day, mostly ignoring action on FX (USD weakness) and stock markets. The US Note future nevertheless gained some traction in the final stages of dealings as US equities failed to hold gains. US President Trump's social media fight (narrower liability protections for social media platforms) and his announced press conference for action against China tipped the balance in the disadvantage of stocks and favour of core bonds. The US yield curve steepened slightly in a daily perspective with yield changes ranging between -1 bp (2-yr) and +1.2 bps (30-yr). Changes on the German curve varied between -0.7 bps and +0.4 bps with the belly outperforming the wings. Peripheral yield spreads vs Germany narrowed by 4 bps to 9 bps.
Asian stock markets trade near unchanged this morning, but the picture is fragile. Dollar weakness is a recurring theme. Core bonds tend to profit. Today's eco calendar contains US trade balance and PCE deflators for April and Chicago PMI for May. We expect risk sentiment to be guarded though in the run-up to Trump's press conference on Chinese sanctions. The severity of which might determine on the length of a possible risk correction. The return of a trade/economic war between the US and China in the current dire state of the (global) economy risks having an extended impact. That should underpin core bonds. US Fed Chair Powell takes part in a virtual discussion. After categorically ruling out the possibility of negative US policy rates, we are eager to hear for comments on official yield curve control; an option the Fed is considering according to NY Fed Williams. We argued before that buying an unlimited amount of bonds for an undetermined period of time implicitly already is a sort of curve control. The US 10-yr yield's flatlining between 0.6% and 0.8% for nearly two months serves as evidence. EMU May headline inflation is expected to slow to 0.1% Y/Y with the core reading at 0.8% Y/Y. A deteriorating growth and inflation outlook will probably prompt the ECB to add stimulus at next week's policy meeting (raising PEPP envelope; extending forward guidance?).
From a technical point of view, the German 10-yr yield is trying to find a fresh equilibrium (-0.6% to -0.4%). For US yields, the Fed's unlimited QE is the de facto start of curve control which reduces volatility. A trading range between 0.6% and 0.8% opened up.
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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