Rates Spark: Upbeat Sentiment Helps Yields Higher

(MENAFN- ING) Markets are happy to take on risk

Risk appetite in the eurozone is healthy and helping yields up from the back end. Monday's eurozone PMI numbers impressed markets and today the German Ifo survey was also slightly better than expected. Germany remains a drag on the overall eurozone growth outlook, but most indicators seem to point towards a careful recovery. And with escalation fears fading in the Middle East, markets have their reasons to take on risk. The upward direction in rates was in line with the pushback from Bundesbank President Nagel, who emphasised that a June cut would not necessarily be the start of a series of cuts.

The upbeat risk sentiment was also reflected in the robust demand for Greece's 30-year bond sale on Tuesday. The syndication benefitted from an S&P outlook upgrade from stable to positive just last week, on the back of tight fiscal policy and a positive growth outlook. The interest in the sale is especially clear when comparing the total orders of €33bn to just the €3bn size of the offering. At a spread versus Bunds of 127bp, the pricing is now well below the high in 2022 of 313bp.

Euro rates will probably take a passenger seat in the rest of the week as the US PCE reading will decide the direction for USTs. Market pricing still indicates close to three ECB cuts for 2024 versus just two cuts in the US. The PCE remaining elevated could lead markets to reconsider the spillovers from a scenario where the Fed holds longer/cuts less. The ECB stresses their independence from the Fed, but markets will still correlate the number of cuts for 2024 with the Fed's path.

The key release is the advanced release of US 1Q US GDP growth, which is not about providing further evidence of US economic resilience. We look for a 2.6% quarter-on-quarter reading, slightly above the consensus of 2.5%. But markets will also use data for the quarter to back out a core PCE reading for March. The consensus for Friday's release still stands at 0.3% month-on-month – still too hot for comfort and probably enough to keep market rates elevated. A lower figure would be the actual surprise and more likely to turn the bearish market sentiment.

In other data we will also get the initial jobless claims with the consensus survey at 215k vs last week's 212k. A bigger surprise to the upside could be market moving, but sentiment should be driven by the earlier GDP release. There is not much data of note from the eurozone, but we have a few appearances by ECB officials like Schnabel, Vujcic and President Lagarde.

In primary markets the US Treasury sells US$40bn in new 7Y notes.

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