Price action limited ahead of big data

Rates

Core bonds trade ended close to unchanged as disappointing EMU eco data (EC confidence data, German CPI), comments by Fed Fischer and strong US consumer confidence only marginally impacted trading. Initial losses on the back op positive risk sentiment were undone after Fed vice-chair Fischer didn't repeat Friday's reference to a September rate hike in a BB TV interview. Crashing oil prices (high inventory data) probably limited the potential impact from strong US consumer confidence. At the end of the day, changes on the German yield curve ranged between +0.5 bps (2-yr) and -2.4 bps (30-yr). The US yield curve moved up to 1.5 bps higher (30-yr) with the front end of the curve outperforming (2-yr: -0.8 bps). On intra-EMU bond markets, 10-yr yield spread changes versus Germany were limited between 0 and +2 bps.

US ADP employment report: foretaste of payrolls

The eco calendar heats up today, both in the US and euro zone with the first estimate of EMU HICP inflation for August, the euro zone unemployment rate, German unemployment rate and claims, US ADP employment report, the US Chicago PMI and pending home sales. Central bankers are active too with Fed's Rosengren, Evans and Kashkari and ECB's Coeuré & Villeroy scheduled to speak. Germany (Schatz), Norway (Bonds), Finland (syndication?) and Portugal (Bonds) will tap the market.

In August, euro zone HICP inflation is expected to extend its upward trend, with the consensus looking for an increase from 0.2% Y/Y to 0.3% Y/Y. If confirmed, this would be the highest rate of inflation since January. Core inflation, on the contrary, is expected to stay stable for a second straight month, at 0.9% Y/Y. We believe that the risks for the headline reading are on the downside due to the drop in the oil price in July. The EMU unemployment rate is expected to renew its downward trend, falling from 10.1% to 10.0% in July, following a stabilisation at 10.1% in June. We have no reasons to distance ourselves from the consensus. In Germany, the number of people unemployed is expected to have dropped slightly in August. In the US, the ADP report might already give an indication ahead of Friday's non-farm payrolls. In August, ADP employment is expected to have increased by 175 000, down slightly from the 179 000 in July. We believe that hiring will continue its recent trend and have therefore no reasons to distance ourselves from the consensus. ADP hiring has been much more stable recently that the official BLS reading, a trend we expect to continue in August. Finally, the Chicago PMI is forecast to have dropped slightly in August, from 55.8 to 54.0. In August, regional indicators were overall poor so we see risks for a weaker Chicago PMI too.

German, Portuguese and Finnish (?) supply

The German Finanzagentur holds a €4B 2-yr Schatz auction (0% Sep2018). Total bids averaged €6.56B at the previous 4 Schatz auctions despite ever lower, record, negative yields. Therefore, we think that this auction will pass without difficulties as well. The Portuguese treasury puts the 3.85% Apr2021 and 2.875% Jul2026 OT's on offer from a combined €0.75-1B. Both bonds cheapened in ASW spread terms going into the auction and trade normal on the Portuguese curve. The looming credit rating decision by DBRS in October (last agency above junk, important for ECB QE, but DBRS sounded downbeat on Portugal recently) could slightly hamper demand, but we expect a plain vanilla auction overall. The Republic of Finland is expected to launch a new 7-yr bond (€3B Sep2023) via syndication, probably today.

Fed Rosengren and ADP report key for trading

Overnight, most Asian equity markets trade mixed with Japan further outperforming on recent yen weakness. The US Note future trades a touch lower, but we expect neutral risk sentiment at the start of the trading session.

There's a lot on the eco calendar today, both in EMU and US (see above), but the US side of the story will probably be the most relevant. A first important event is a speech by Boston Fed Rosengren, currently a voter. The Fed governor is rather neutral so any comments in favour or against a near term rate hike could trigger repositioning. During the US trading session, we look out for the ADP employment report and (to a lesser extent) Chicago PMI. We expect the ADP to print near consensus, but a decent/strong reading could already be welcomed by markets as a herald of decent payrolls on Friday.

Our preferred scenario for the Fed is a September rate hike. If confirmed by incoming eco data and/or Fed speak, this should weigh on US Treasuries and trigger a further (bear) flattening of the US yield curve.

Despite Monday's technical rebound, we expect that the US Note future could break below strong support (130-26) in case of good payrolls on Friday. This would deteriorate the technical picture and pave the way for more losses. The Bund will take a similar direction as the Note future, but the sideways range between 168.54 and 165.68 looks safe.

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