markets lack direction with central banks on glide path (they hope)….Thursday

Another quiet night leading up to the ECB announcement this morning, with data overnight continuing its weak bent and markets preparing for holidays, with May Day tomorrow and Golden Week in Japan kicking off as well. ECB was a non-event, largely as expected, while we wait on Lagarde press conference at 8:30 AM ET. As of 8:15 AM ET, Treasuries are small lower in yield with belly leading while US equity index futures are mixed to lower ahead of the cash open. TY volume at 7 AM ET was still under 170K so you get the idea!

Treasuries and futures have again seen anemic volume and very little theme to overnight trade. With Asia quiet ahead of Golden Week (starts tonight with Japan out and Treasuries closed until 2 AM ET). Treasuries opened flat to 3 PM marks in Asia, caught a very small bid in long end on small month end Japanese real money buying and Japanese lifer receiving in USD 30y swaps, along with soft Caixan report, then traded sideways at slightly better levels until just before the European open, at which point Japanese real money account lifted 5s and TYM contracts to help the belly lead Treasuries higher. As per usual, central banks showed up to buy 5s and 7s and mortgages (like clockwork) to give the belly a better bid.

Intermediates came under pressure on the European open as both 10s and bunds swooned on some macro account and deal-related selling in both. But that didn’t last long as Treasuries were soon back on their highs as more soft European data hit, BTPs led peripherals wider, and risk has struggled since shortly after the European open. Swaps were rather themeless overnight, not that there was anything monumental in Treasuries. European real money account did receive in USD 10y swaps and bought 10s outright, RV account bought 10s against bunds (hasn’t worked yet). Since mid-morning in Europe, post data, market has barely traded waiting on the ECB.

Locally in Asia, the RBA held back its buying schedule causing early pressure on rates there, while New Zealand again found decent demand for its sovereign paper, with both auctions being well-bid and stopping through their pre-auction levels. Japan was quiet for its one trading day between Showa Holiday and start of Golden Week. JGB yields closed down .5 bps in 10y space, Kiwi rates were 4 bps lower in yield, while AUD rates were to unchanged to .4 bps higher in yield in a steepener. News included Japanese Parliament getting close to passing larger budget for COVID-19 response and soft Chinese data: Caixin manufacturing was 49.4 vs 50.3 consensus (can’t believe anyone really thought “expansion”), while retail sales for March dipped 4.6% and Chinese PMI printed 53.2 (vs 52.5, but offset by manufacturing PMI that was weaker). After the rally in US yesterday, Asian stocks traded firmer all night, up between 1% and 3% across the board.

Bunds dragged Treasuries lower right after a firm opening in Europe on deal-related flows, seeing better dealer selling of bunds. That was short-lived though as the pressure returned on BTPs and soft data across the continent printed. There was an early seller of 10K ERM0 (front June euribor) on block at 100.345, which is thought to be beginning of unwinding a large position that was put on between April 15th and 23rd. Bund yield is down 3.5 bps while Italy leads peripherals wider, up 3.5 bps. Gilts meanwhile have seen macro selling against bunds for month end (adjustment), but have found support from performance of Treasuries and bunds along with DMO not ramping up issuance as bad as feared (for now!). RV account sold gilts on the open but money managers have been better buyers since risk turned south. Soft data remains the theme in Europe: French flash GDP at -5.8% (expected -4%, whatever, not really a surprise), German unemployment rises more than expected, you get the joke. Risk has turned tail since mid morning in Europe, with European equity indices down between 1% and 1.5%.

Today in the US, we get weekly claims, income/consumption and PCE all at 8:30 AM ET, followed by Chicago PMI at 9:45 AM ET. Probably the biggest event on the schedule for the rest of today will be Lagarde’s press conference at the bottom of the hour. That will be about it for data, no Fed speakers, just the buybacks and month end. For the final time, US Treasuries extend .14 years, MBS extends .05 years, EGBs extend .16 years and Gilts contract .09 years.

Vol got leaned on again yesterday, even after gamma tried desperately to stage a rally into the FOMC, and today is already getting leaned on again. That will happen when nothing is trading and the central bank has telegraphed steady at lower level rates for as far as the eye can see. No playing in vol here, just don’t be short the upper left at these levels: cover shorts or watch it trade, but there is nothing to initiate in vol space right now. For choice today in TYM, call the range at 139-12 to 139-00. If we take out 138-29+ today, don’t look for any support levels to hold until at least 138-15+; below there, watch 138-11+/12+, then 138-02. Below 137-28, market will fly again to 137-22 and then 137-16. But think risk is to rally here, so above watch 139-08, the aforementioned objective at 139-12, 139-16+, 139-19, 139-27, the longer term minimum at 140-02, 140-18.

Have a good Thursday and be healthy,