Forex - Weekly Bond Outlook & Strategy, APAC, 22-26 May

 16:12 (GMT) 19 May

  [Economic Data]

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Weekly Bond Outlook & Strategy, APAC, 22-26 May (0100-PCQQ-C01)

UST respite after some levels hit last week, but can't see this as a strong yield low yet. Curve still biased flatter.

Italy ends week at key 10yr spread threshold. Portugal remains on a run, 3% eventual target on 10s, then maybe time to profit-take

Gilts rally only corrective while above 128, more so below


A tough week ended with some respite, as risk saw a broad based bounce, and core bonds came further off the Thursday panic yield lows. Action was still rather circumspect though into the weekend, bunds and gilts off some 20-30 ticks. In non-core, the tone remained solid, with Portugal and Italy in particular seeing some further spread narrowing.

For USTs, likewise the bias was still corrective off the Thursday best levels with T.note off the 126-20+ tests back towards 126, as the S&P made its latest great-escape effort in clearing back above 2365 to the familiar levels of recent weeks. Fed's Bullard typically dovish, though also argues data weak since last meeting. Even he though sounds like would go along with a June move still.

Market Outlook

Weekly Bond Outlook & Strategy, APAC, 22-26 May (0100-PCQQ-C02)

While all looked well again come Friday with the mid-week panic seemingly quick to subside (especially on the nuggety S&P), it is hard to be convinced we have seen the end of it just yet.

As argued on Thursday, the rally got to some levels across the board where it was appropriate to see the easy yards as having been travelled (162-ish tops on bund, 132~ on bobl, 129-ish YTD tops on gilts, 126-20-ish Apr tops on T.note for example) and that was a good time for some pullback and consolidation to set in. Once the impulsiveness of the reaction to the Trump news ebbed and EM moves also neutralised after some outsized spike, momentum was going to flag.

Beyond that however, this currently still only counts as a breather rather than anything that can be called a top. The story isn't going to go away and although the appointment of an official investigator ought to bring some order to things, it's not stopping the parallel Congress investigation and nor, so far, has it stopped the press from getting a running commentary on any potential smoking guns. Monday will probably bring fresh concern over weekend press stories, or relief that none have surfaced, but either way it is a story that will run on.

Weekly Bond Outlook & Strategy, APAC, 22-26 May (0100-PCQQ-C03)

Safehaven-intensive issues aside, there also seems no shortage of yield grab in play as a background force. On US30s, 2.94/5% is yield bounce resistance ahead of 35, and the pull has been lower towards the April range lows at least. The unlike the T.note does still have more headroom to 155-16 from April without having to make a blue skies move. The US curve is still currently trend flattening, even if it has slowed. 2s30s was inching through the Oct-15 flats late last week, Jul-Aug 16 wides just above 160 (any further than that and its heading back to circa 150bp).

Weekly Bond Outlook & Strategy, APAC, 22-26 May (0100-PCQQ-C04)

On Tuesday we expect Apr new home sales to correct lower by 5.8% to 585k while on Wednesday we expect Apr existing home sales to slip by 0.4% to 5.68m, though we still see housing market fundamentals as positive.
Wednesday's calendar highlight may be FOMC minutes from the May 2-3 meeting. We would expect these to show a fairly strong degree of confidence that the tightening trajectory is on track despite some recent weak data. There is also likely to be some detailed discussion on the balance sheet, which should support perceptions that tightening remains on track.
On Thursday we expect a slightly wider advance goods trade deficit of $64.7bn versus $64.2bn. On Friday we expect Q1 GDP to be revised up to 0.8% from 0.7%, though the upward revision should be stronger excluding inventories. At the same time we expect a 1.0% fall in Apr durable goods orders led by aircraft, but a healthy 0.7% rise ex transport.

The US supply cycle returns to the short-end/belly, with $26bn 2s, $34bn 5s and $28bn 7s this week.

Weekly Bond Outlook & Strategy, APAC, 22-26 May (0100-PCQQ-C05)

In the Eurozone, yield grab has stayed quite a notable force of late. On Portugal, PT10s are now not that many sessions away from 3%~ at the recent pace. Having been fans from the 4 ¼ 5 highs, that might be time though to look for the move to run out of gas.

IT-DE 10s finished the week at a key level again, the 175bp~ floor that has held 3 tests so this is an important area - if it goes this time, then BTPs will follow the crowd in making it back to the turn-of-year kind of levels.

The Eurozone calendar starts Tuesday with German Q1 GDP (Final) is expected to be confirmed at 0.6%q/q and 1.7%y/y. We expect the Ifo business climate survey to rise to 113.5 in May (April: 112.9). We also expect the current conditions index to rise to 121 (prev: 120), while the business expectations index is seen rising to 106 (prev: 105.2).

Weekly Bond Outlook & Strategy, APAC, 22-26 May (0100-PCQQ-C06)

On Wednesday, the Eurozone flash manufacturing PMI survey is expected to rise slightly to 57 in May from 56.8 in April. At the same time the services PMI is seen slightly higher at 56.8 (prev: 56.4), which should bring the composite measure to 57 (prev: 56.8). Thursday sees a market holiday for Ascension Day.

It's a light week for scheduled supply, halving this week, though that may well open the way for some syndication sales. Germany takes up the lion's share of that, with a EUR5bn 6/19 schatz auction Tuesday and EUR3bn bund sale Wednesday. Italy has CTZ and linkers on Friday.

Weekly Bond Outlook & Strategy, APAC, 22-26 May (0100-PCQQ-C07)

Gilts are another market that so far fit with a corrective rather than a top script. The future back to 128~ would still be just a dip to support and potentially a base for another push higher. Below instead is a different story near-term and pulls back further into the recent range.

In the UK, on Tuesday we see public sector net borrowing (Apr) and on Wednesday CBI distributive trades (May). On Thursday we expect the second GDP estimate to confirm 0.3%q/q and 2.1%y/y. Production is seen lower at 0.1%q/q from 0.3%q/q after a weak outturn in March, but unless services completely stall in March, the downward revision to production shouldn't be enough to push total GDP lower.

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