- Rates: Geopolitical tensions protect downside bonds short term
Risk sentiment will probably set the tone for trading. Rising geopolitical risks suggest short term downside protection for core bonds. Today’s eco calendar won’t move trading, but speeches by ECB Weidmann and Coeuré are wildcards. Will they follow fellow-hawk Nowotny who went off script on Tuesday, arguing in favour of a deposit rate hike soon after ending APP? - Currencies: EUR/USD rebound to slow post-Fed Minutes
Yesterday, the dollar remained in the defensive for most of the day. However, the US currency found a better bid after the publication of the Fed minutes. Is this a harbinger that the EUR/USD rally will slow? Today, the eco data will probably be only of intraday significance for USD trading. Geopolitics will remain a wildcard
The Sunrise Headlines
- US stock markets ended mixed with Dow (-0.25%) underperforming (energy stocks, lower oil price) and Nasdaq (+0.9% ahead of Apple earnings) outperforming. Asian equities record small losses overnight.
- A Tory fraction is considering withdrawing support for government bills in Parliament in opposition of the post-Brexit plans for a customs partnership with the EU, the Telegraph reports, citing unidentified sources.
- Special Counsel Mueller, in a meeting with US President Trump’s lawyers in March, raised the possibility of issuing a subpoena for Trump if he declines to talk to investigators in the Russia probe, a former lawyer for the president said.
- The Chinese Caixin manufacturing PMI unexpectedly picked up in April (51.1) as output quickened slightly, though a decline in export orders reinforced risks to the outlook as firms continued to shed staff while inventories also rose.
- Apple flexed its financial muscle with a record $100 billion plan to buy back stock from investors, as it reported strong gains in revenue and profit even as growth in the number of iPhones sold remained weak. (WSJ)
- S&P lowered Turkey’s foreign currency credit rating to BB-, citing the deteriorating inflation outlook, the long-term depreciation and volatility of the nation’s exchange rate and the risk of a hard landing.
- Tonight’s Fed meeting takes center stage today. Data on offer include US ADP employment report, EMU Q1 GDP, EMU unemployment rate and final manufacturing PMI. Germany holds a Bobl auction and ECB Weidmann speaks.
Currencies: EUR/USD Rebound To Slow Post-Fed Minutes
FOMC statement: upbeat inflation assessment?!
The Bund didn’t trade yesterday with German markets closed for Labour Day Holiday. The US Note future lost marginally ground in a low-volume trading session ahead of tonight’s FOMC Meeting. Lower oil prices and a bigger-thanexpected setback in the US manufacturing ISM (57.3 from 59.3 vs 58.3 forecast) didn’t play a role of importance. The US yield curve bear flattened with yields 1.5 bps (2-yr) to 0.5 bps (30-yr) higher. The US 2-yr yield closed above 2.5% for the first time since August 2008. The US 5-yr yield sits close to the highest levels since 2009.
Most Asian stock markets trade with small losses, underperforming WS. The US Note future loses more ground while the dollar is mixed. We expect the Bund to open somewhat weaker in a catch-up move.
The FOMC meeting takes center stage today. We expect no policy changes. The market implied probability of a 25 bps rate hike stands at 35%, suggesting room for consolidation at the front end of the US yield curve. We think that the inflation assessment in the policy statement will be upgraded, adapting to most recent PCE prints (2% for headline and 1.9% for core). The soft Q1 GDP reading will likely be labeled transitory. The Fed will normally also flag a June rate hike. Overall, we thus expect the statement to boost chances of 3 additional rate hikes this year, our favoured scenario which should sustain the longer term uptrend in US yields. The immediate market reaction could be more muted as the above outlined scenario is probably discounted. The probability of 3 more hikes this year yesterday rose above the probability of 2 moves (current FOMC median) for the first time (37% vs 35%). Apart from the Fed meeting, Q1 EMU GDP data and ADP employment will be published.
The recent core bond sell-off lifted US yields towards key resistance in the 10- yr (3.05%/3.07%) and 30-yr yield (3.22%). A new surge in US price indicators or inflation expectations is probably necessary to trigger a real test. The German 10-yr yield bounced off key support levels (0.46%/0.48%), suggesting the start of a new upleg towards 0.8%. Last week’s ECB meeting shouldn’t be a structurally hampering factor.
US 2-yr yield closes above 2.5% resistance for the first time since 2008 on the eve of the FOMC meeting
