Will Powell give the nod for a July rate cut?
Rates
Friday's profit taking move didn't continue in this week's first trading session. The main leap higher occurred at the start of European trading without a strong driver. Geopolitical concerns could have played a role with the US weighing and eventually announcing new sanctions against Iran. Whatever the reason, we note that yesterday's gains came amid extremely low volumes. Stock and oil markets lost slightly ground. The main eco event, June German Ifo business sentiment, showed a stabilization near May levels. The German yield curve bull flattened with yields losing 0.6 bps (2-yr) to 3.4 bps (30-yr). US yields fell by 3.6 bps (2-yr) to 4.3 bps (5-yr). 10-yr yield spread changes vs Germany narrowed up to 3 bps with Italy underperforming (+3 bps) and Greece outperforming (-9 bps).
Asian stock markets lose ground this morning with China underperforming (-1.5%). US President Trump's sanctions against Iran and the country's response dominate headlines. These geopolitical concerns weigh on risk sentiment and push core bonds higher. The US 10-yr yield is back testing 2.01% key support.
Today's eco calendar contains several US eco data. June consumer confidence is the most important. Consensus expects a decline from 134.1 to 131 with risks probably tilted to the downside following weakness in labour market reports. Several Fed governors speak, including chair Powell. Markets turned even more softer since the Fed's June policy meeting. A July rate cut is 100% discounted, with market 60/40 split on whether it will be a 25 bps or 50 bps one. Will Powell align with one of these market views or try to tone down expectations? Speeches by ECB De Guindos and Coeuré are wildcards. The US Treasury starts its end-of-month refinancing operation with a $40 bn 2-yr Note auction. The arriving supply operation generally exerts some selling pressure on the US Treasuries, but that hasn't been the case this time around. Friday's G-20 meeting keeps a lot of investors side-lined.
Long term view: The onus of the ECB is back on potential easing measuring including revamping asset purchases or cutting rates. The German 10-yr yield set a new all-time low. There's no trigger available at this stage to escape the lows, let alone negative territory. The Fed opened the door for cutting rates with a July rate cut discounted. The US 10-yr yield remains near 2.01%. There's probably little room for a strong rebound unless eco data improve significantly. Current circumstances probably favour a break lower instead.
Author
KBC Market Research Desk
KBC Bank
