Rates Spark: Post-trade deal, the spotlight shifts to data

There has been a muted market reaction to the announcement of a US-EU trade deal, shifting the focus to the numerous data points this week. The little movement in rates reflects a mix of two things. For one, the idea of a trade deal being reached was in the making for a couple of weeks, already pushing the curve higher. Second, the details of the deal don’t seem great for the eurozone, offsetting the positive headlines with a slightly disappointing aftertaste. Equities, for instance, opened higher but reversed the gains throughout the day. In any case, in our view, a significant amount of uncertainty has been taken away, which should still be positive for risk sentiment and the near-term economic outlook. We therefore stick to our bearish call for euro rates.

US markets seem to be benefiting more from reaching an agreement, driven by Trump’s more market-friendly approach to his negotiations of late. But the real test will be this week’s data. Today, we have consumer confidence data and the JOLTS jobs report. And then on Friday, the important payroll numbers. Until then, we don’t think there will be much scope for US rates taking on a new direction. The Fed meeting will be of interest, but will unlikely provide clear answers about the Fed’s next move.

Meanwhile, Dutch pension reforms are underway, adding to the upward pressure on longer-dated euro rates. The eventual flows are hard to estimate, but the DV01 impact from unwinding interest rate hedges could be as high as €500m. We may also see a broader rebalancing of the fixed-income portfolio, whereby government bonds will be reduced. But delays are still a risk. Read more about the four things to watch.