US bond yields continue to bottom out

Markets

We weren’t expecting much impact from yesterday’s US durable goods data given important events and data due later this week. Yet it proved a pivotal moment for day trading, especially in core bond markets. Goods orders, be it headline or core, by and large disappointed. Some special factors including an outsized drag from aircraft weighed. US bond yields had been rising up until the release but reversed course thereafter. The exception to the rule was the 2-year bond yield. Yesterday’s 2-y auction tailed slightly and kept the yield (+1 bp) close to intraday highs. A 5-y auction went smoother but its yield finished 1.3 bps higher nevertheless. The long end of the curve outperformed with the 10-y at some point rising 4 bps and nearing 1.6% before paring yield gains to 0.8 bps only. German bond yields finished a volatile session flat, with the final down leg occurring in sympathy with the US. USD/JPY managed a comeback from south of 108 to 108.08. The trade-weighted DXY (90.8) found support at the 61.8% retracement or 90.82 area. EUR/USD failed to keep the 1.21 it took out in Asian dealings and closed at 1.2086 instead. The same story goes for EUR/GPB (close at 0.8695) and 0.87, cementing that barrier’s status as a tough nut to crack.

The Bank of Japan kept rates steady this morning. It boosted the growth outlook but cut in inflation prospects. The Japanese yen is under slight pressure. USD/JPY advances further north of 108. South Korean GDP came in better than expected, supporting the SK won marginally to USD/KRW 1109.9. USD/CNY (6.48) drifts further south of 6.5 after strong Chinese industrial profits for the month of March. The US dollar in other (G10) pairs retains a minor upper hand. Asian equities mostly lose territory, South Korea (-1%) included. Core bonds stick to a slight downward bias.

Aside from the BoJ, we also have policy meetings by the Riksbank and the Hungarian central bank later today. Economic data are limited to US Conference Board consumer confidence, which is seen sharply higher to 113 (from 109.7) as the vaccine progress offers brighter prospects. US Treasury sells $62bn of 7-year bonds. Data and bond supply, in theory, support bond yields. US bond yields continue to bottom out. Some (e.g. the 10-y) already tested first resistance levels. We stick to the view however that a sustained break needs the green light from Powell tomorrow. The yielding process might support the US dollar for the time being, as seen yesterday, to a lesser extent this morning and possibly after the Fed. But as long as EUR/USD keeps north of 1.20, the technical picture remains neutral. First support kicks in at 1.206. For EUR/GBP it is a matter of decisively taking out 0.87(3) before turning the charts positive for the pair. Until then, sideways trading is rangebound between 0.86/0.87.

News Headlines

Economic activity in South Korea rebounded at a faster than expected pace in Q1. Gross Domestic Product grew 1.6% Q/Q, beating expectations for a rise of 1.1%. The Q1 performance brought activity in the country back above the pre-pandemic level of the last quarter of 2019. Q1 GDP rose 1.8% Y/Y. The growth was mainly driven by exports (1.9% Q/Q) and investment (6.6% Q/Q). Consumption grew at a more moderate pace of 1.1% Q/Q. The South Korean Finance Minister indicated that growth this year might be slightly stronger than the 3.2% expected until now. The South Korean economy contracted 1.0% last year.

The Bank of Japan left the parameters of its monetary policy unchanged with the short-term policy rate at -0.1% and the target for the 10-y bond yield at 0%. The QE approach which was recalibrated last month also remains in place. In its quarterly outlook, the BoJ slightly raised its growth forecast for the fiscal year that started this month from 3.9% to 4.0%. Growth next year is seen at 2.4%. The forecast for inflation was sharply reduced to 0.1% for this fiscal year, mainly due to the effect of lower cellphone fees. Expected inflation for 2022 (0.8%) and 2023 (1.0%) remains well below the 2.0% target. 

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