The Global core bonds were severely affected by a massive profit-taking move on September 5. Even though positive risk sentiment and new progress in US-Sino trade talks helped, it could be that Lagarde comments of September 4 still resonated.
Also, Lagarde backed the current accommodative policy and said that it might remain around for quite a while. But there might be negative side-effects from extra monetary stimulus while reaching a hand to the fiscal action that is coordinated. These quotes from the IMF boss catalyzed profit-taking on the long Bond rally that continued on Thursday.
Most of the other ECB members lately watered down the chances of a new asset purchase program. The German bonds underperformed US Treasuries until the release of a stellar US non-manufacturing ISM (56.4 from 53.7). That ended fears that the weakness in the United States manufacturing industry is already affecting the general US economy.
The German yield curve bear steepened further in the daily chart with yields gaining by 2.4 bps (2-yr) to 14.2 bps (30-yr). Notably, the German 10-year yield closed above the minor first resistance (-0.61%). If it is confirmed on Friday, it will result in a more sideways trading range that will end a 12-month decline.
The 10-year yield spread changes compared to Germany ended almost flat with Italy (+6 bps) underperforming and Greece (-7 bps) outperforming. The United States yields added 8bps (30-year) to 10.8 bps (5-year). This morning the Asian stocks were trading higher by 0.5%. On the other hand, the eco/event news is thin.
What Might Happen?
The core bonds currently trade listless although they remain around the correction lows registered on September 5. The economic calendar for September 6 is quite interesting in the US. The August payrolls report is expected to show +160k net job growth. So far, the August employment data have been mixed.
Even in yesterday’s stellar ISM, the employment components in the national and regional business gauges have disappointed. However, the labor market report from ADP still forecasted a +195k net job gain. Notably, the correlation between payrolls and ADP is not what it used to be. Thus, traders and investors must remain cautious about today’s outcome.
After the recent market moves, not a big miss is expected for the core bonds to regain their traction. It will take more than the latest sell-off for the already stretched bond markets to find a new ST equilibrium. The Fed Chair, Jerome Powell, will speak on the status of the economy after the European session close. He could give the final go-ahead for a September rate cut but that move is discounted at the moment.
The ECB will meet on September 12 while the FED meets on September 18. These meetings may either lock or shape the economic policy for many months to come. Currently, the markets expect rate cuts from both meetings. Data shows that the German 10-year yield has tested the all-time low (-0.73%) in the last and this week.
The downside alert will only be called off if there is a sustained return above the first minor resistance hovering around -0.61%. A similar resistance for the US 10-year yield has formed around 1.6%. On the downside, the key levels to watch are 1.44% and 1.32% which is the all-time low.