EMU Q1 GDP: reality check?

Core bonds suffered some losses in yesterday's bizarre trading session which mainly centered around disappointing EMU/US eco data. Stock markets and oil prices hovered near opening levels with new highs for main US indices. The German yield curve bear steepened with yields 1.6 bps (2-yr) to 2.6 bps (30-yr) higher. The US yield curve moved in similar fashion with yields adding 1 bp (2-yr) to 3.1 bps (30-yr). 10-yr yield spreads vs Germany narrowed with Spain (-4 bps) outperforming with political event risk out of the way.

Asian stock markets are mixed overnight amid disappointing from Alphabet and Samsung. April Chinese PMI data suggest that the March rebound might have been a one-off. Official PMI's (manufacturing & services) and the Caixin manufacturing gauge all faced an unexpected setback. The silver lining of the report might be a rebound of new export orders, but that component still remains in contraction territory (<50). Core bonds regain most of yesterday's lost ground with US Treasuries outperforming. Japanese markets are closed through May 6 with Chinese markets closed for the remainder of the week.

Today's eco calendar heats up with Q1 EMU GDP, German inflation data, US housing prices, April Chicago Manufacturing PMI and consumer confidence. French Q1 GDP matched forecasts this morning (0.3% Q/Q) with Belgian growth at 0.2% Q/Q. Consensus expects 0.3% Q/Q for the euro zone as a whole, but we fear downside risks. German (and EMU later this week) are expected to show a significant rebound, but we expect little reaction to this Easter-related, onemonth, bounce. The notoriously volatile Chicago PMI is expected to stabilize, but we see downside risks following other regional surveys. Consumer confidence is forecast to rebound from 124.1 to 126.8. We side with consensus. Overall, we think that today's mix of eco data will remain supportive for core bonds. German Bunds could outperform in the process with US investors keeping the Fed meeting, ADP employment, ISM's and payrolls in mind.

Long term view: markets concluded that the ECB missed out on this cycle. They even start pondering the possibility of an additional deposit rate cut. The downtrend in the German 10-yr remains in place so far. Regarding Fed policy, markets now discount a 65% probability of a Fed rate cut by December. The US 10-yr yield earlier this month returned above the lower bound of the previous 2.5%-2.79%. This turned the picture more neutral again, but the move lacks conviction.

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