Forex - Bonds Weekly Outlook & Strategy, APAC, 23-28 Jun


 16:00 (GMT) 21 Jun

  [Economic Data]

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Bonds Weekly Outlook & Strategy, APAC, 23-28 Jun (0101-MBGZ-C01)

Bonds Weekly Outlook & Strategy, 23-28 Jun

- Although mkt remains UST bullish m/t, a very oversold mkt is vulnerable this week to any positive rhetoric out of US-China G20 trade talks, while charts also look corrective n/t

- Bunds too look like ceding ground near-term unless G20 bombs

- Gilts have managed to base out around 0.8% recently, 0.9%- first resistance on the bounce

Market Recap

Bunds ran into some end of week correction, helped by the higher French and to a lesser extent German PMI, if then tempered by the less impressive EZ prints. Choppy elsewhere - Greek bonds ran into a blast of profit-taking though the 20bp+ backup was then reversed. BTPs slightly outperformed out of the debt swap though yields were still net up.

Encouraged by a touch of relief at no US Iran strikes, USTs finish the week paring back the overstretching rally, 10s bouncing on the move back above 2% and short end to belly especially on the recovery of 1 ¾ %. PMIs slipped but didn't have the same impact as last month's sharp slide while existing home sales picked up.

Market Outlook

Bonds Weekly Outlook & Strategy, APAC, 23-28 Jun (0101-MBGZ-C02)

Last week's buying fever finally broke to an extent on Friday as the recently overstretched rallies - yields outruning 2stdev from trend across the curve - had to relent. The monthly technical got even more extreme with the 14-week RSI at a rare 22 oversold extreme.

The market is left in a slightly awkward near-term position where it is still eying potential yield downside forecasts ahead on its dovish assumptions but has got very long, very stretched and now lacking any obvious immediate trigger points to be charging further. At the same time, there is not a lot of impulse to be aggressively selling here either, at least at present, and any backup is more like a bit of tactical squaring from some to look to book a profit and find better levels. That said, the charts have turned lower so technical traders will have adjusted their sights to further correction potential.

Bonds Weekly Outlook & Strategy, APAC, 23-28 Jun (0101-MBGZ-C03)

G20 remains the next obvious major event this week though that can clearly influence both Fed and market thinking however and potentially have a decent impact depending on how the talks go. Indeed, as well as the data, this is arguably what the Fed will be monitoring more than anything ahead of the July meeting. If the rhetoric is credibly positive then the danger would be an outsized shakeout with 10s to 2.1% and then even 2.2% if the exit of fast money proved fierce. Neutral outcome of no disaster or success may still see yields drift off the lows alongside a 'time correction'. Fresh breakdown in relations of course and the market could again look to go into overdrive for a real crash low move in yields.

On the future, close below 155-01 would have technical traders pulling out near-term and further corrective downside to 154 or lower.

Bonds Weekly Outlook & Strategy, APAC, 23-28 Jun (0101-MBGZ-C04)

Europe has as much invested in the G20 outcome as elsewhere, even if it is in the slightly no-win position of being the next likely target for Trump if a China interim resolution ever does get signed off. IFO data is perhaps the main local highlight this week but would have to go some to be more pessimistic than market.

On the charts, bunds hit a channel high at 172.88 and look to roll back from there. 171.42/50 is next down on further slippage. Semi-core has been the high beta version of late and also prone to cede a bit of ground if the overall bias remains corrective for the next few days.

Greece has been very volatile of late and on Friday in the end did not hold onto the big early backup. Nonetheless, as the July elections come into closer frame this week, the potential is still for further long liquidation here after a strong run especially if broader yield grab relents. 2 ¾ % has been the yield bounce high so far after the basing out at 2 ½ %, but there remains potential back to 2.9-3% on a further outbreak of nervousness over the new government's plans.

Bonds Weekly Outlook & Strategy, APAC, 23-28 Jun (0101-MBGZ-C05)

For gilts, 0.8%- has survived as support for 10s over what was a very fixed income bullish week and so looks pretty robust nearby as a base region. Approx 0.9% is first minor retracement of the big move down and also the late May break region.

Data & Events
After a Monday with only minor releases due, on Tuesday we expect a 2.5% rise in May new home sales to 690k. Jun consumer confidence is due at the same time. The Fed speaking line up is concentrated on Tuesday, including Powell, who will be the most closely watched. Also due are opening remarks from moderate voter Williams, moderate non-voters Bostic and Barkin, and voting dove Bullard.

Bonds Weekly Outlook & Strategy, APAC, 23-28 Jun (0101-MBGZ-C06)

On Wednesday we expect May durable goods orders to fall by 1.0% on continued weakness in aircraft. Ex transport should see a marginal 0.1% increase. At the same time we expect May's advance goods trade deficit to rise to $72.8bn from $70.9bn.

Bonds Weekly Outlook & Strategy, APAC, 23-28 Jun (0101-MBGZ-C07)

On Thursday we expect Q1 GDP to be revised up to 3.4% from 3.1% on consumer spending and construction. Weekly initial claims data is due at the same time and May pending home sales later. Friday should see a weak 0.1% increase in May's core PCE price index, with a 0.4% rise in personal income and a 0.5% increase in spending.

Tuesday will see the BoJ meeting minutes of April policy meeting. On Thursday, retail sales likely picked up by 0.8% y/y in May, a slight improvement from previous month. BoJ's Wakatabe speaks on Thursday.

Friday will likely see unemployment unchanged at 2.4% in May. Industrial production likely dropped further by 2.5 % y/y in May as manufacturing sector still suffered from weak external demand. Tokyo CPI and BoJ's summary of opinions will be due as well.

Bonds Weekly Outlook & Strategy, APAC, 23-28 Jun (0101-MBGZ-C08)

The German Ifo survey will start the data week on Monday. We expect the index to fall to 97 in June (prev: 97.8) which will be the weakest level since November 2014

The broad EC sentiment indicator will then be released on Thursday along with the flash estimate of German June HICP. We expect German inflation to correct marginally higher to 1.4% in June followings May's fall to 1.3% (April: 2.1%).

Flash EZ June consumer inflation data will then be released on Friday, where we expect the headline rate to be unchanged at 1.2% while core inflation is seen stable at 0.8%.

The current worries about a hard-Brexit will continue to be fanned by the politicking that will be at the heart of the Conservative leadership batter that now goes out to the membership. One thing is clear, is that both candidates have predispositions toward easier fiscal policy, regardless of the form and timing of Brexit they may preside over. This may be an issue for the BoE which may be pressed on in terms of its possible response to such policy leanings when its gives belated testimony to parliament on Wednesday on the May Inflation Report. This would obviously come alongside any quizzing the BoE gets to rationalize the still-hawkish leanings offered in its June verdict!

Bonds Weekly Outlook & Strategy, APAC, 23-28 Jun (0101-MBGZ-C09)

Otherwise, the coming week has two high-profile sets of data, both arriving on Friday. We envisage no change to the preliminary Q1 GDP result in final numbers. As such there should be a repeat of the 0.5% q/q increase which was (understandably) in line with consensus thinking too and boosted the y/y rate to a six-quarter high of 1.8%. That 0.5% Q1 rise was inventory related (alone adding some 1.5 percentage point), albeit this being more than offset by a 6.8% q/q surge in imports.

Notably, we also see no change in the breakdown which currently estimates a small recovery in business investment and a clear pick-up in household consumption growth, albeit not to the extent that the apparent strength in retail numbers had suggested. Very much these swings are Brexit related, with a precautionary inventory-build and boost to consumer spending as both households and companies anticipated the original Brexit deadline.

While the March and April GDP data suggest that the Q2 GDP data will show a contraction, the balance of payments data to be released alongside may be of some key market interest. Indeed, the updated numbers suggest that the Q1 current account deficit (as % GDP) deteriorated possibly to in excess of the record-high gap of 6.7% set at the end of 2015.

The CBI retailing survey arrives on Tuesday, with more insight into consumer lending dynamics from UK Finance numbers on Wednesday.


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