TOP NEWS
• Euro zone industry output rises, employment hits record high
Euro zone industrial output grew in April and employment rose in the first quarter of the year to reach a record high, data
showed, in fresh signs of healthy growth of the bloc's economy. The European Union's statistics office Eurostat said industrial production in the 19-country single currency bloc rose by 0.5 percent from March, in line with market expectations. Year-on-year output in April output went up 1.4 percent, slightly higher than market forecasts of a 1.3 percent rise.
In a separate release, Eurostat said employment in the euro zone in the first quarter grew by 0.4 percent on the quarter
and by 1.5 percent on the year.
• China's economy holds up in May but slowing investment points to cooling
China's economy generally remained on solid footing in May, but tighter monetary policy, a cooling housing market and
slowing investment reinforced views that it will gradually lose momentum in coming months. Still, with half a year left to
go, Beijing is expected to handily meet its annual 6.5 percent economic growth target without too many bumps. Industrial output grew at a steady 6.5 percent pace in May from a year earlier, defying expectations for a slight softening, as a
government infrastructure spree continues to boost demand for building materials from cement to steel.
• UK earnings after inflation shrink at fastest pace since 2014
British workers' earnings after inflation are shrinking at the fastest pace since 2014, underscoring the economic challenge facing a weakened Prime Minister Theresa May as Inflation hit an almost four-year high of 2.9 percent in May,
fueled by the fall in the pound since last year's Brexit vote and adding to the strain on household budgets, according to
data published. Workers' total earnings including bonuses after taking inflation into account fell by an annual 0.4 percent
in the three months to April after edging up 0.1 percent in the first quarter.
• ECB critics, weary of lax policy, voice fresh doubts
Top critics of the European Central Bank's asset purchase scheme expressed fresh doubts about the effectiveness of
the programme, laying down their arguments just as the bank prepares for a debate on extending the measures. Jens
Weidmann, president of the powerful Bundesbank, argued that the ECB, now a top creditor to euro zone governments,
is at risk of coming under political pressure because any hint of policy tightening poses the risk of pushing yields higher
and blowing a hole in national budgets.
• BOJ to keep policy steady, reassure markets stimulus exit still distant
The Bank of Japan is set to keep monetary settings unchanged on Friday and reassure markets it will lag way behind
the Federal Reserve in dialling back its massive stimulus programme, with inflation stubbornly low despite a strengthening economy. Governor Haruhiko Kuroda will also dispel market speculation the BOJ is engaging in "stealth tapering" by
stressing that the recent slowdown in the bank's bond buying is not intentional and simply the result of a stable bond
market, say sources familiar with its thinking.
COMPLIMENTARY REPORT
Click here to access the Thomson Reuters' May 2017 corporate bond monthly report
THE MORNING BENCHMARK
CENTRAL BANK BALANCE SHEETS
MORNING MEETING
DATA
• 07:00 MBA Weekly Mortgage Application Indices
• 08:30 Retail Sales (May) (mkt +0.2% m/m, prev +0.4% m/m)
• 08:30 Retail Sales ex-Autos (May) (mkt +0.2% m/m, prev +0.2% m/m)
• 08:30 Retail Sales Control (May) (mkt +0.3% m/m, prev +0.3% m/m)
• 08:30 CPI (May) (mkt 0.0% m/m, +2.1% y/y; prev +0.2% m/m, +2.2% y/y)
• 08:30 CPI ex-Food and Energy (May) (mkt +0.2% m/m, +1.9% y/y; prev +0.1% m/m, +1.9% y/y)
• 08:30 Real Average Weekly Earnings (May) (prev +0.4% m/m)
• 10:00 Business Inventories (Apr) (mkt -0.2% m/m, prev +0.2% m/m)
• 10:30 EIA Weekly Petroleum Status Report
• 11:00 Cleveland Fed CPI (May) (prev +0.1% m/m)
• 11:00 TR / Ipsos PCSI (Jun) (prev 61.52)
EVENTS
• 09:00 Two-Day FOMC Meeting Resumes (see Fed Outlook )
• 14:00 FOMC Statement and Summary of Economic Projections
• 14:30 Fed Chair Press Conference
MARKET BIAS
• The tactical bias is long the 30-year at 2.851% looking to sell the 3-year post the 08:30 data to leg into a flattener.
• Look for a range of 2.25% to 2.15% in 10s
• The strategic bias is flat after exit a 50% position in 10’s from 2.195% at 2.212% versus covering a 50% short in the 30
-year from 2.863% at 2.87% and covering a 50% short in the 30-year from 2.875% at 2.87% for a combined loss of 1.5
bp
• The curve bias is flat
OVERNIGHT NEWS RECAP
• Market opens risk-on as impact from US tech slump slips further into the distance
• Talks between UK PM May's Conservatives and N.Ireland's DUP restart - Rtrs
• Bundesbank Weidmann says ECB may face political pressure to keep policy loose - Rtrs
• Brent holds just above $48 as US stockpiles rise
• Shanghai Composite loses 0.74% on weak investment data
• German May CPI Final -0.2% m/m (exp -0.2%, prev -0.2%) and 1.5% y/y (exp 1.5%, prev 1.5%)
• German May HICP Final -0.2% m/m (exp -0.2%, prev -0.2%) and 1.4% y/y (exp 1.4%, prev 1.4%)
• UK May Claimant Count 10.0k (exp 7.3k, prev 22.0K)
• UK April ILO Unemployment Rate 4.6% (exp 4.6%, prev 4.6%)
• UK April Average Weekly Earnings 2.1% 3m/yy (exp 2.4%, prev 2.3%)
• UK March Average Weekly Earnings (Ex-Bonus) 1.7% (exp 2.0%, prev 1.8%)
• EZ Q1 Employment 0.4% q/q (prev 0.4%) and 1.5% y/y (prev 1.4%)
• EZ April Industrial Production 0.5% m/m (exp 0.5%, prev 0.2%) and 1.4% y/y (exp 1.3%, prev 2.2%)
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THE MORNING BENCHMARK
• COMMENT: Brexit – One that has cross-party agreement
OVERNIGHT TREASURIES
• Bonds slightly higher overnight after 126-05/06 holds again
• 126-16+ recent highs holding ahead of 126-22
• Modest volume, 134k 10-year futures trade by 05:55 EST
• Sep T-notes in 126-08/126-11+ range, last at 126-08+
• 10s trade 2.195%/2.211% overnight, last at 2.197%
• 2s/10s marginally flatter as long leg outperforms
• New low for at 84bp the flattest since October last year
OVERSEAS SOVEREIGNS
EGBs
• Core EGBs tread water ahead of US FOMC
• Lack of negative news allows peripherals to again outperform
• France spreads corrects slightly after yesterday’s tightening
• 10-yr Germany/France 0.25bp wider at 34.5bp
• Germany taps €2.429bn 10-yr: reasonable auction
• Portugal taps €1.25bn in total of 5-yr & 10-yr: very solid auction
• 10-yr peripheral spreads tighter to Bunds: Italy -2bp, Spain -1.5bp, Portugal -5.5bp
• 10-yr Bund trades 0.27%-0.2575% range, yield falls 0.25bp to 0.265%
• Sept Bunds trade 164.83-165.05, prev settle 164.93, last at 164.94
• Sept Bund Volumes at 179k as of 06.15 EST
• Bund 2s/10s curve 1bp flatter at 96.5bp
GILTS
• Gilts open higher as Fed caution underpins
• 10-yr Gilts trades 1.039% to 0.991% range, last at 1.004%
• Sep Gilts trade 127.88 to 128.45, prev settlement 127.96, last at 128.30
• Sep Gilt Volumes at 55k as of 06.30 EST
• Gilts 2s/10s curve 1bp flatter at 87.5bp
• 10-yr Germany/UK 3bps tighter at 74bp
RATES SNAPSHOT
10-yr
Current Yield
US
2.198%
JGB
0.060%
BUND
0.261%
GILTS
1.000%
Prices from Tradeweb
Spread to Trsy (bps)
-214
-194
-120
EQUITY RECAP
NIKKEI 19883.52, -15
• Nikkei loses 0.08% as Fed caution prevails
DAX 12861.72, +97 FTSE 100 7538.98 +39
• FTSE gains 0.51% as tech sector continues to recover
Dow Futures +24 S&P Futures +2, NASDAQ Futures +10
FX SNAPSHOT
USD/JPY 110.22
EUR/USD 1.1204
COMMODITY SNAPSHOT
Gold $1267.31 +$1.96
Oil $48.31
-$0.41
SPREAD PRODUCT OUTLOOK
MORTGAGES
• The 30-year current coupon yield closed on Tuesday at 2.951%, with the spread to the 10yr treasury note at +74.4bp
(+0.1bp), +96.1bp (unch) to the 5yr10yr treasury average, and at +78.8bp (unch) versus the 10-year swap
• No FedTrade is scheduled due to the FOMC events this afternoon
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THE MORNING BENCHMARK
• Today is Class B net out
• “Investors Dig Into New Take On Mortgage Bonds”
TRADEWEB MARKETS (AS OF 0700 ET)
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