US and Taiwan Set to Sign the First Deal Under a New Trade Talks Framework

Core bonds enjoyed another solid bid yesterday, further unwinding ‘hawkish sentiment’ that reigned since mid-May. Chinese inspired risk-off and softer than expected national CPI data from Germany (HICP 6.3% Y/Y from 7.6%) and France (6.0% from 6.9M%) supported the move. Italian inflation (8.1% from 8.7%, but 7.5% expected) didn’t suffice for bond investors to change tactics.

That said, German/European yields already reached intra-day lows early in the session, settling in a sideways pattern later. In the end, German yields lost between 3.8 bps (30-y) and 7.8 bps (5-y). US yields joined the broad bond market rebound, but the intraday pattern was a bit more choppy. Eco data were mixed with an awful Chicago PMI (40.4 from 48.6) and an unexpected rise in US April job openings (10 103k vs 9400k expected).

While seen as important input for the Fed, JOLTS didn’t stop the decline in yields. Fed speak was at least partially to blame. Fed’s Harker and Jefferson both supported the idea of a Fed pause/skip in the rate hike cycle to assess incoming data before deciding about the extent of further policy firming. Market expectations on a June Fed hike dropped below 50%. US yields declined between 5.2 bps (5-y) and 2.9 bps (30-y).

The Fed Beige book showed anecdotical evidence of employment and price growth slowing. The risk-off initially supported further USD gains but the US currency returned most of them late in US dealings (DXY 104.33, USD/JPY 139.34 from 139.79). The euro still underperformed (EUR/USD 1.0689). Sterling maintained its recent momentum (EUR/GBP 0.8592) even as UK yields corrected more than was the case in the US and Europe. US equities lost between 0.41% (Dow) and 0.63% (Nasdaq). Oil at first looked like going for a test of the YTD lows, but found a bottom intraday with brent closing at $72.66/b.

Asian risk sentiment this morning turned positive with China and Japan gaining about 0.5%-1%. US yields trend 3-4 bps higher. The dollar gains, albeit modestly. Today’s calendar is well filled with the Flash EMU May CPI, US ADP employment change, weekly jobless claims and manufacturing ISM. EMU headline inflation is expected to ease from 7% to 6.3% with downside risks after this week’s national data. However, the focus will be on the core measure (expected at 5.5% from 5.6%).

After this weeks correction in yields, a big negative surprise is needed to support further gains in European bonds. 2.17%/2.2% remains tough support for the German 10-y yield (currently 2.28%). Soft US data could fuel expectations for a Fed pause in June after yesterday’s ‘Fed-guidance’. A Fed wait-and-see approach combined with a better risk sentiment could in theory cap further USD gains. However no obvious support is currently in sight, especially in the EUR/USD cross rate. Also keep an eye at the EUR/GBP cross rate. Sub 0.86, probably quite some good news is discounted for sterling. Key support comes in at 0.8547 (Dec low).