UNITED STATES

Yesterday was an eventful day in the bond markets as it marked a major set back in. We saw a yield spike in European rates with Italy leading the way (20bps move on 30-Yr) and with the German 30-yr (+13bps on the day) to end the day at -0.003%. On the US front we also saw a correction in the treasury curve with 10 year and 30-year yields spiking 10bps and 9bps respectively. The reasons to the correction are several. Firstly, there were positive trade war news yesterday with the US and China pencilling in a meeting for October which reflects a willingness of progress from both sides. Second, there was strong US private payrolls data, better-than-expected service-sector data and a deluge of corporate-bond sales. Third, there is a growing group of ECB policy members that sequentially voiced their concern on a re-initiation of QE which is much priced in and is to be presented on the ECB, September 12th meeting. Still, forecasts by a panel of Bloomberg economists see Draghi sticking to the much needed stimulus and delivering on the prescribed agenda. Studies performed by the chief economist of the ECB see a need of 1% GDP growth to the Euro area; since 2014 the total stimulus package has contributed a mere 1.9% to GDP growth. The targeted growth would equate to QE of 83bn/month over a year’s horizon and a 15bps cut. Still, reading various research reports the base case scenario would be a rate cut of 10bps and asset purchases of 30-40bn/month. Interestingly, a lot of noise is made on opposers of the possible recommencement of the QE program while these are a narrow pool of 6 policy makers, most of which are considered hawks. Out of the 25 total council members 10 are doves/convinced while 8 are centrists/silent.

What awaits us today? First and foremost, we have the much-awaited US non-farm payrolls and unemployment data which are predicted at 158k versus 164k the previous month. Yesterday’s business payrolls by ADP Research Institute showed 195 versus the estimate of 150k, July’s figure stood at 142k. This data could be perceived as a preliminary indication of today’s as it shows jobs of the private sector i.e. forms a decent proportion of the total figure.

Subsequently, Fed Chairman Powell is expected to make an appearance in Zurich today, long after European markets close. This marks the last public appearance he makes pre FOMC meeting on September 18th. The market is pricing in a 90.6% probability of 25bps rate cut while many analysts say that a larger move i.e. 50bps cut is required to knee jerk the front end of the yield curve and steepen it. On yesterday’s yield spike moves of the treasury curve many analysts cite that they don’t see it further increasing from this level while they maintain their opinion that the future trend for yields is downward.

RUSSIA

Turning to Russia, the CBR meets today and expectations are for a 25bps rate cut and remain cautiously dovish for going forward as the the seasonally-adjusted annualised run rate of inflation in Russia keeps undershooting the CBR’s 4% target.

LATAM

Other news to note, in Brazil, the pension reform was approved in the senate CCJ together with the parallel bill to include the states, that if passed by the Senate next Wednesday should bring the fiscal impact of R$1.4 trillion in 10 years. Furthermore, the government tried to appease the global community by announcing that it would direct the $230 mio of fines collected from the Car Wash scandal to sustain the activities and education for the Amazon. Brazil enjoyed a very well bid driven day, further supported by the risk-on tone in the markets from the easing of the global recession fears, particularly in the long end of the PETBRA curve with PETBRA 2115 seen jumping 70c on the day to as high as 113.7 lvls before retreating slightly into the close. BRAZIL sovereign curve however didn’t not seem to enjoy the risk-on mood with the long end trading down 40-50c on average. ARGENT on the other hand continued to rise with ARGENT 21s up another almost 3pts to high 47 lvls and ARGENT 2117 up 2pts to 43 lvls. In Mexico, the issuers continued coming to the market after the success of BIMBOA. Industrias Penoles (PENOMX), an IG rated mining group issued their debut bonds yesterday, coming with a 2 tranche (10Y/30Y) each $550 mio at T+260/T+270, gathering an impressive almost 6x oversubscribed demand. Both tranches performed unsurprisingly well and were seen trading up as high as +0.875pts/+1.375pts above reoffer respectively. BBVA came to market with a new 15.5NC10 Tier 2 bond, printing $750 mio at the yield of 5.875%, the bond however, despite an almost 4x oversubscription, was see trading 1/8 below reoffer into the close.