Bond Blowout Starts Event Extravaganza Day

Just when the market thought it had priced in a new equilibrium without (or with - it is not quite clear) a Syria war, here comes Thursday with a data dump that will make one's head spin. Central bankers are once again on parade starting overnight, when the BOJ announced no change to its QE program and retaining its monetary base target of JPY270 trillion. The parade continues with both the BOE and ECB, the latter of which is expected to address the recent pick up in Eonia rates and take praise for the recent very much unsustainable "recovery" in the periphery even as Germany continues to slide lower (this morning's factory orders plunged 2.7% on exp. -1.0%), which in turn lead the Bund to pass above 2.0% for the first time since March 2011. Speaking of bonds blowing out, the US 10Y is now just 6 bps away from 3.00%, the widest since July 2011, and likely to breach the support level, taking out a boatload of stops and leading to the next big step spike in rates as the second selling scramble ensues. And just to keep every algo on its binary toes, today we also get a NFP preview with the ADP private payrolls at 8:15 am (Exp. 180K, down from 200K), Initial Claims (Exp. 330K), Nonfarm Productivity and Unit Labor Costs (Exp. 1.60% and 0.9%), Factory Orders (Exp. -3.4%), Non-mfg ISM  (Exp. 55), Final Durable Goods, EIA Nat Gas and DOE Crude Inventories, oh and the G-20 meeting in St. Petersburg where Putin and Obama are not expected to share much pleasantries, and where John Kerry's swiftboat may not be allowed to dock.

Overnight news bulletin from BBG and RanSquawk:

  • German 10yr yield now over 2.00%, up +11bps (last time at 2.0% was in March 2012) and USTs testing 3.00%, highest since June 2011.
  • The BoJ unanimously voted to keep monetary policy unchanged and also raised its assessment of Japan's capital spending and economy.
  • Treasuries fall, with 10Y yields approaching YTD highs, as market prepares for nonfarm payrolls tomorrow (est. 180k, unemployment rate holding at 7.4%) and implications for QE tapering at Fed’s Sept. 17-18 meeting.
  • Bank of England releases interest rate decision and asset purchase target at 7am New York time, ECB rate decision at 7:45am with Draghi press conference at 8:30am
  • German factory orders fell 2.7% in July, more than median estimate in Bloomberg survey for 1% decline; Germany 10Y yield rose above 2% for first time since March 2012
  • The BOJ upgraded its assessment of the economy today; Kuroda, seeking to overcome doubts about a sales-tax increase, said policy makers can act if needed with fiscal and monetary stimulus
  • Sweden’s central bank kept its main lending rate unchanged and stuck to a plan to start tightening late next year
  • A Senate panel sent the Obama administration a contradictory message on next steps in Syria, voting to constrain U.S. military action to avoid being drawn into the civil war and expand covert support for Syrian rebels
  • Italian Prime Minister Enrico Letta risks losing control of his parliamentary coalition as lawmakers argue over proceedings to strip ex-Premier Silvio Berlusconi of his seat in the Senate
  • Sovereign yields higher, EU peripheral spreads narrow. Euro Stoxx Banks +0.1%. Nikkei little changed, Shanghai Composite falls 0.4%; USD/JPY at 99.86 after  rising through 100 level overnight. European equities mixed, U.S. equity index-futures fall. WTI crude, copper and gold decline

Market Re-Cap

Even though the risk appetite which saw stocks edge higher at the open ebbed amid rising bond yields, which in turn saw major equity indices move to unchanged levels, financials remained the best performing index amid expectations that the ECB will seek to downplay the recent rise in money rates. As such, despite what is widely expected to be dovish press conference by Draghi, higher bond yields, which were also a product of supply from Spain and France, ensured that EUR/USD recovered following a somewhat lacklustre open. Nevertheless, the theme of rising bond yields on the back of growing expectations of the Fed committing to  tapering QE this month saw the 1y1 USD OIS rate edge to its highest since June 2011, with USTs yield also at its highest since June 2011. On the geopolitical front, late yesterday the US Senate Foreign Relations Committee voted to approve a resolution backing a limited military operation against the Syrian government. Going forward, market participants will await the outcome of monetary policy meetings by the MPC and the ECB, as well as digest the release of the latest weekly jobs report, ISM Non-Manufacturing report and the weekly DOE data.

Asian Headlines

The BoJ unanimously voted to keep monetary policy unchanged and also raised its assessment of Japan's capital spending and economy.

- BoJ 2014 Monetary Base Target (JPY) (Sep 5) 270trl vs. Exp. 270trl (Prev. 270trl)

- The BoJ stated Japan's economy is recovering moderately and that it will ease until 2% inflation is stable.

PBoC official says an early exit from its QE program will have short-term impact on China's capital account liberalisation as it could trigger fluctuations in capital flows.

EU & UK Headlines

BoE & ECB September Rate Decisions due at 1200BST (0600CDT) and 1245BST (0645CDT).

German Factory Orders (Jul) M/M -2.7% vs. Exp. -1.0% (Prev. 3.8%, Rev. 5.0%)

German Factory Orders WDA (Jul) Y/Y 2.0% vs. Exp. 2.9% (Prev. 4.3%, Rev. 5.6%)

- German Economy Ministry in positive trend in orders remains intact.

Spanish bond auction results: Sold EUR 4.008bln vs. max target of EUR 4.0bln:

- Spain sells EUR 1.6bln 3.75% 2018, bid/cover 2.61 vs. Prev. 1.7 (yield 3.477% vs. Prev. 3.561%), tail 2.7bps vs. Prev. 2.8bps.
- Spain sells EUR 2.4bln 4.40% 2023, bid/cover 1.98 vs Prev. 2.3 (yield 4.503% vs. Prev. 4.723%) - lowest yield since September 2010, tail 2.3bps vs. Prev. 2.5bps.

France sells EUR 8.385bln vs. Exp. EUR 8.5bln:

- Sells EUR 2.485bln 3.25% 2021, b/c 2.036 vs. Prev . 2.50, avg. yield 2.17% vs. Prev. 1.42%
- Sells EUR 4.24bln 0.25% 2023, b/c 1.924 vs. Prev. 1.70, avg. yield 2.57% vs. Prev. 2.32%
- Sells EUR 1.66bln 3.25% 2045, b/c 2.283 vs. avg. yield 3.60%

US Headlines

Fed's Kocherlakota (non-voter, dove) said Fed forecasts suggest the need for more stimulus, not less. Kocherlakota interest rates are artificially high and inflation and unemployment goals will be realised in 5 years. Kocherlakota added the Fed has not communicated effectively what policy will be when unemployment falls below 6.5%.


Even though the risk appetite which saw stocks edge higher at the open ebbed amid rising bond yields, which in turn saw major equity indices move to unchanged levels, financials remained the best performing index amid expectations that the ECB will seek to downplay the recent rise in money rates. Having underperformed
yesterday, FTSE-MIB is the best performing index in Europe, with Telecom Italia trading up over 5%, following reports that Egyptian tycoon Naguib Sawiris, AT&T and America Movil have approached the core Telecom Italia investors who want to exit their unprofitable investment in the Italian group, a source familiar with the situation said.


Even though the BoJ kept rates unchanged, interest rate differential flows saw USD/JPY edge above 100.00 for the first time since late July. However, while the spot rate was bid, implied vols traded heavy which suggests that long-gamma positions, especially those above the key 100.00 may cap further gains for the pair. EUR/USD and GBP/USD trade in minor negative territory ahead of monetary policy decisions by the MPC and the ECB.


The US Senate panel authorizes limited US military strike in Syria. The White House has praised the Senate Foreign Relations Panel for quickly approving the use of military force in Syria. The vote by the panel clears the way for a vote on the resolution in the full Senate, likely next week.

US API US Crude Oil Inventories (Aug 30) W/W -4200K vs. Prev. 2500K
- Cushing Crude Inventory (Aug 30) W/W -1900K vs. Prev. -863K
- Gasoline Inventories (Aug 30) W/W -387K vs. Prev. -1100K
- Distillate Inventory (Aug 30) W/W -109K vs. Prev. 3K

In the Atlantic region Tropical Storm Gabrielle has maximum sustained winds of 35 knots and heading in a northwesterly direction according to the NHC.

In the Eastern Pacific region there is a 70% chance of a tropical storm formation with environmental conditions set to be conductive for development over the next few days according to the NHC.

Workers at the Salvador copper mine are due to begin a strike today after contract negotiations broke down, according to a union leader.

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DB's Jim Reid with the full event narrative

A full day of central bank policy meetings, US jobs data and the G20 summit will be keeping investors busy over the next 24 hours. Overnight, the BoJ kicked things off by keeping its policy unchanged (as expected) but it mildly upgraded its assessment of the economy to “recovering moderately” from “starting to recover”. Attention will now turn to Japan’s final Q2 GDP numbers due next Monday which the market is expecting will show a sharp upward revision in growth to 3.9% QoQ annualised (vs a preliminary estimate of 2.6%). In terms of the ECB, our European economists expect another challenging press conference today. With the longest euro area recession on record having ended in Q2 and all key activity indicators rising, the credibility of the ECB forecast of an easing bias “for an extended period” is being questioned. Our economists expect the ECB to acknowledge the recent improved data, but these will be interpreted as being in line with a baseline forecast of ‘gradual’ economic recovery that still faces downside risks. DB expects no changes to the staff forecasts for growth or inflation in 2014, and the Council view of the recovery is unlikely to have changed appreciably. With this in mind, our economists expect the forward guidance to remain unchanged, but the question remains whether or not the market will be any more inclined to believe the forward guidance this month.

Heading into today, risk assets are trading firmer led by a 1.2% and 0.9% gain in the Hang Seng and KOSPI respectively, and S&P futures are at 1655 (+0.1%). Indian equities are outperforming (SENSEX+2.6%) after the newly appointed RBI governor laid out a policy of less regulation, more liberalization, greater competition, and higher liquidity. Indian banks have reacted positively to the announcements with bank stocks up 7% this morning. The AUD is a touch weaker against the USD after a below consensus trade report for July (deficit of $765m vs surplus of $100m expected). Also out overnight, Moody’s downgraded the subordinated debt rating of a number of Asia-Pacific banking jurisdictions including Hong Kong, Korea, Singapore and Australia. The rating action comes after the rating agency decided to remove the uplift provided for systemic government support on subordinated debt ratings. Moody’s ratings of senior bank debt are unaffected by the announcement and there has been very little impact in terms of market reaction.

Markets remained largely resilient yesterday despite some small wobbles late in the US session. News that the US Senate Foreign Relations Committee voted to approve a resolution backing a limited military operation against the Syrian government saw the S&P500 (+0.8%) drop a couple of points towards the close, but the overall damage from the headline was contained. While the resolution itself is expected to go before the Senate mid next week, the overall Syrian situation is set to cast a shadow of today’s G20 summit in St Petersburg although the conflict is not formally on the Summit’s agenda. Yesterday Russia’s Putin said US Congressional approval without a U.N. Security Council resolution would be an act of aggression.

Yesterday also saw the 10yr yield on US treasuries (+4bp) pop back up to the top of its recent trading range of 2.90%. Encouragingly, stocks and credit markets managed to shrug off the rise in yields together with Syrian headlines to post modest gains, though European government bond markets continue to be weighed by the weakness in USTs. It was another large day of corporate issuance on both sides of the Atlantic (over $8bn yesterday in the US) as issuers take advantage of a brief lull before Friday’s payrolls and a number of event risks slated over the remainder of the month. Worthy of note was Sprint Corp’s $6.5bn high yield bond deal which is described as the biggest high-yield bond offering since 2008. Issuance of USD-denominated high yield bonds have totaled $243bn this year and are on pace to beat the record $357bn raised in the same market last year according to Bloomberg data. The jumbo Sprint deal comes just a day after Verizon Communications began the process of sourcing debt funding for its $130bn buyout of a 45% stake in Verizon Wireless from Vodafone. The Verizon buyout is being billed as the third largest M&A deal in history behind Vodafone’s $203bn takeover of Germany’s Mannesmann in 2000 and the $162bn AOL/Time Warner merger in the same year - and substantially larger than the 4th largest M&A deal which was the RBS-led acquisition of ABN AMRO in 2007 (The Guardian).

Yesterday’s dataflow was fairly mixed. The day began with a revised-lower service sector PMI from the Euroarea (50.7 vs 51.0 flash estimate) before the attention turned to a wider than expected US trade deficit for July (-$39.1B vs. -$34.5B previously). The surprising largely rise in US imports seemed to be the key driver of the overall trade balance providing some hope that this was an indicator that domestic US economic conditions were improving more rapidly than the international growth. The Fed’s beige book, compiled by the San Francisco Fed, indicated that economic activity expanded at “modest to moderate” pace. DB’s US economists point out that the main difference from the previous beige book was the weakening in lending activity as most districts reported “no better than modest growth”. This appears to be more focused on mortgage refinance activity as “purchase mortgage lending continued to grow modestly in most districts”.

Looking at the day ahead, we have a pretty full calendar as we head into the business-end of the week. Starting with Europe, Draghi’s post ECB press conference will garner most of the attention and we will be interested to see whether the BoE concludes its meeting with a policy statement. The G20 leaders will be discussing growth, trade, banking transparency and fighting tax evasion – Syria will be discussed on the sidelines. Today’s US ADP employment report will be closely watched ahead of tomorrow’s non-farm payrolls. Markets are expecting a 182k print on the ADP headline. We also get the weekly initial jobless claims, the ISM non-manufacturing and factory orders. So there’s plenty to digest today.