Forex - Bonds Weekly Outlook & Strategy, APAC, 26-30 Aug


 16:22 (GMT) 23 Aug

  [Economic Data]

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Bonds Weekly Outlook & Strategy, APAC, 26-30 Aug (0101-NPNY-C01)

Bonds Weekly Outlook & Strategy, 26-30 Aug

- Fri's action and fresh trade escalation potentially turns charts around and could now see US10s complete the run to the major 1.4-1.32% lows

- Recent 30yr bund failure shows the problem at these levels, but fresh trade escalation may see recent tops re-tested all the same

- Johnson already rowing back on deal hopes, 'shouldn't hold breath'. The 38% retracement test of GB10s held and rolled back, looking like n/t high

- Tuesday is deadline day for Italy coalition talks.

Market Recap

Bunds reversed early losses after China's move to respond with $75bn of tariffs in Sep and renewed auto tariffs in Dec, adding to the pullback on Trump's following tweets. Gilt yields also pulled off the highs after test of 38% retracement by core backdrop though still underperformed as Johnson talked up deal prospects. BTPs again outperformed as PD said had hopes for coalition talks with 5star with no insurmountable obstacles, IT5s -4.5bp.

USTs were on the defensive overnight waiting for Jackson Hole though were then bolstered by (typically) dovish comments from Bullard, seeing robust debate on -50bp in Sep, and the China tariff retaliation. There was then relief that Powell's speech did not echo some of the more hawkish regional Fed comments and chose not to overtly re-direct the market away from Sep easing expectations, instead noting some of the negative developments since the last meeting, if still seeing the economy in a favourable place close to Fed goals. Gains then sharply accelerate as Trump tweets aggressively negative China comments and pledges to respond to China's tariff move that afternoon.

Market Outlook

Bonds Weekly Outlook & Strategy, APAC, 26-30 Aug (0101-NPNY-C03)

Friday's engulfing bar fully reversing the week's hard fought US yield backup suggested that any immediate threat of a more extensive corrective yield lift looks to have been set aside.

The market is used to Trump verbals but Friday's outburst was on a different level while threatening fresh escalation rather than letting things stand at the current tit-for-tat level of escalation.

Powell's speech also came as something of a relief to the market not for what he said - very much the same message of 'good economy with downside risks' but what he didn't say, namely that rates were now at a better wait and see level or any similar echoing of earlier regional Fed opinion. That Powell didn't imply that this was new guidance and didn't take the opportunity to disabuse the market of its Sep easing expectations, instead noting some of the 'eventful' negative news since the last meeting, added up to a good deal of relief for longs. At the same time, Trump's outburst still plays to the notion that the president is almost willing to provoke economy endangering trade escalation in the pursuit of forcing the Fed's hand on further easing, crazy though it sounds (he even said the Fed spoke without asking him what he was about to do).

Action on Friday turns the near-term complexion around, notwithstanding the still stretched nature of recent action and the slowdown since the early August momentum action.

Bonds Weekly Outlook & Strategy, APAC, 26-30 Aug (0101-NPNY-C02)

Danger is that USTs now post a fresh early week high for the bull run. The recent circa 20bp correction for US2 is similar size to the last few blips and could give way to fresh yield lows slightly through.

Up the curve, the major 1.4-1.32% low from 2016 still looks at risk of filling to complete the run to what would then be more major make-or-break territory on the long-term chart.

In Europe, the heavily unsold 30yr bund auction last week showed the market's lack of appetite at these extremes and leave USTs outperforming inevitably during safety rallies. And yet, it will be hard to entirely resist the backdrop if the trade war does not ramp up to another level in terms of hostility as well as content.

Bonds Weekly Outlook & Strategy, APAC, 26-30 Aug (0101-NPNY-C05)

On the bund future, the regain of 178 ½ neutralises the correction signal and sees scope to at least re-test the recent top. If the mood really turns sour, then the market would put to one side any thoughts of cutting exposure and taking profit yet ahead of the ECB.

It will be hard for the wider market to escape the dominant influence of how the latest chapter of this trade story plays out in coming days. Italy does still has its own idiosyncratic story and Tuesday is the deadline for coalition talks to be concluded. PD have been talking positively of 'no insurmountable obstacles' to a deal, though in terms of very short-term risk-reward the market is now pretty set for good news here so a failure to agree and resulting snap election remains the danger. In that scenario, BTPs would likely give back ground before fresh buyers resurface.

Bonds Weekly Outlook & Strategy, APAC, 26-30 Aug (0101-NPNY-C04)

In the UK, there may already be signs of some rowing back as Johnson finds himself arguably outplayed by Merkel's move to push the ball back into his court. Now the talk is about a deal 'not being a sinch' and 'not getting hopes up too soon'. The recent 38% retracement move on GB10s may prove something of a near-term high water mark on the yield bounce, especially if the global trade war theme is back in ascendancy early next week.

Data & Events

Bonds Weekly Outlook & Strategy, APAC, 26-30 Aug (0101-NPNY-C06)

In the US, on Monday we expect a 1.5% increase in Jul durable goods orders but a 0.2% decline ex transport. On Tuesday Jun house price data, recently soft, from FHFA and S&P Case-Shiller are due. Also on Tuesday Aug consumer confidence should see some impact from equity volatility. Monday's sees the Dallas Fed's Aug manufacturing survey, and Tuesday sees the Dallas Fed's services survey. Richmond Fed data, both manufacturing and services, are due on Tuesday.

Bonds Weekly Outlook & Strategy, APAC, 26-30 Aug (0101-NPNY-C07)

Little is due on Wednesday but on Thursday we expect Q2 GDP to be revised down to 1.7% from 2.1% on inventories and public construction spending. Weekly initial claims are due with GDP and Jul pending home sales follow. On Friday Jul personal income should rise by 0.3%, spending by 0.5% and core PCE prices by 0.2%, with the latter rising to 1.7% from 1.6% on a yr/yr basis. Aug Chicago PMI and Final Aug Michigan CSI data follow, both of which were significantly weaker in their preceding releases.

The European Commission's sentiment indicators will be released on Thursday. Notably, the business climate indicator fell below 0 in July for the first time since late-2013 and, given the poor survey data from Germany, it is likely to dip further in August. Consumer confidence has, so far in 2019, moved in a relatively narrow range of -7.4 to -6.5, with the flash figure pointing at -7.1 for August that are likely to be confirmed.

On Friday, we expect August Eurozone inflation to edge higher to 1.1% from 1% in July and we expect a similar trend for core inflation, which should rise to 1% from 0.9% in July. This results from still negative base effects from energy compress headline inflation, but less so than in the past few months. The unemployment data released on the same day are set to confirm in August the 7.5% rate recorded in July.

On Monday, we envisage some consolidation in the headline and component parts of the Ifo survey in the upcoming August numbers. Indeed, the headline is seen rising 0.3 point to 96.0, this making little inroad into the 1.8-point slump witnessed in July, that being the largest in a four-month run of declines that pulled the overall figure to the lowest since 2014.

Bonds Weekly Outlook & Strategy, APAC, 26-30 Aug (0101-NPNY-C08)

On Tuesday we do not expect any revision top the preliminary Q2 GDP result, ie still showing a 0.1% q/q dip. The details will be interesting, not least the dynamics behind the apparent continued rise in consumer spending - ie to what extent this came in spite of rising household savings.

Taken from lander data due on Thursday, we expect German HICP inflation to increase slightly to 1.2% y/y in August from the 1.1% recorded in July, which was the lowest level since November 2016. Having slowed from 1.9% in 2018 to an average of 1.6% in H1 2019, we expect headline inflation to soften further in H2 as lower energy prices exert stronger negative base effects. Earlier in the day, the labor market report should still show solid signs with the jobless rate remaining near the existing record-low of 5.0%

The coming week has a little more on the UK data slate. First up on Tuesday comes the CBI's quarterly insight into services, these results having been volatile but clearly depressed of late. The week ends with (GfK consumer confidence data which are likely to see another batch of soft, but not depressed, readings, albeit with still little appetite to spend being signaled. Also on Friday comes the BoE money and credit numbers which are likely to show further signs of a slowing in consumer lending, most notably on the unsecured side.

Otherwise on Tuesday, the BoE is releasing discussion paper discussing the impact of the Brexit vote on productivity, this possibly having repercussions about possible more long-running supply problems the UK may have especially if the UK were to leave the EU.


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