US inflation back in negative territory?

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Greece leaves stamp on trading

Yesterday, news flow on Greece suggested that chances of an imminent default increased. European bond and equity markets reacted accordingly. Stock markets corrected lower (Dax -1.9%), Greek spreads exploded and the Bund added gains. The German 10-yr yield fell below 0.10% and the 30-yr yield below 0.50%. As US investors entered dealings, global core bonds came off the intraday highs on a combination of comments by Fed vice-president Fischer (see below) and a slightly stronger Philly Fed indicator. That move lower was short-lived though.

At the end of the session, the German yield curve bull flattened with yields 0.1 bp (2-yr) to 3 bps (30-yr) lower. Changes on the US yield curve ranged between -1.5 bps (5-yr) and +3.6 bps (30-yr). On intra-EMU bond markets, the corrective widening continued with 10-yr yield spreads 65 bps wider for Greece, 20 bps for Portugal, 14 bps for Italy and 11 bps for Spain.

US inflation back in negative territory?

The eco calendar contains CPI inflation data in the EMU (final) and US, together with the preliminary estimate of US U. of Michigan consumer confidence for April. The G20 meeting continues in Washington and the IMF and World Bank meetings start with several central bankers taking stage including ECB’s Draghi.

According to the preliminary estimate for March, euro zone HICP inflation picked up from -0.3% Y/Y to -0.1% Y/Y. Core inflation, on the contrary, slowed from 0.7% Y/Y to 0.6% Y/Y, reaching again its record low. The final reading is forecast to confirm this outcome. We have no reasons to distance ourselves from the consensus. In the US, CPI inflation is expected to stay unchanged at 0.0% Y/Y in March. On a monthly basis however, inflation is expected to have risen by 0.3% M/M. We believe that the risks are for a weaker outcome. Core inflation is expected unchanged to, at 1.7% Y/Y, while a monthly increase by 0.2% M/M is forecast. Finally, University of Michigan consumer confidence is expected to show a limited increase in April, from 93 to 94. Both the weekly Bloomberg indicator and Conference Board’s consumer confidence improved significantly recently and therefore we believe that also the Michigan indicator might surprise on the upside.

Fed comments shift further to September lift-off

Plenty of Fed governors spoke yesterday. Vice-President Fischer was the most optimistic. He admitted that Q1 growth was poor but “there’s definitely a rebound on the way already”. Whether the recovery will be spectacular or just moderate is hard to say now. On inflation, Fischer said that he is seeing more signs every day of wage growth. The VP didn’t take a stance on the Fed’s lift-off date. Atlanta Fed Lockhart, a heavyweight centrist, turned more cautious on rate rises given the uncertain outlook. Earlier, Lockhart gave equal chances to the June/July/September meetings regarding the lift-off. Yesterday, he said he didn’t completely rule out June but it’s not his preferred option. Boston Fed Rosengren was dovish as expected. He said the FOMC’s two conditions for raising rates haven’t been met. The Fed wants to see “further improvements in the labour market” and they want to be “reasonably confident” that inflation was heading back to the 2%-target. Cleveland Fed Mester is still comfortable with a first rate hike “relatively soon”. She was a tad more cautious as well, indicating that incoming information between now and June had to confirm that Q1 weakness was only temporary. In that case, the US economy has improved to the point where risks of delaying tightening outweigh benefits of keeping ZIRP.
Overall, we conclude from recent data and Fed speak that chances of a June hike became very low with September being the preferred option.

Today’s Strategy

Overnight, most Asian equities trade lower with the expectance of another Chinese outperformance. The US Note future trades sideways suggesting a neutral opening for the Bund.

Today’s European calendar is again very thin with only final the EMU CPI for March. Investors will further digest the dovish ECB meeting and developments in Greece. Together with the bullish technical picture, they suggest even more gains for the Bund. However, as we’ve entered overbought conditions, short term profit taking ahead of the weekend is likely. There are no signs that a downward correction will go far though.

In the US, more eco data are up for release (see above). US Treasuries are eager to react to disappointments as was the case the past days. With risks to the downside of expectations for CPI and Fed governors clearly shifting towards a September hike, more gains are possible today.