Markets mixed ahead of US day as after weak Chinese data impact fades (Tuesday)

Soft Chinese data ahead of their joining the Golden Week festivities tomorrow were offset by better Eurozone GDP and German state CPI numbers to leave markets mixed ahead of the US open, as volume remains on the lighter side with Japan already in their extended Golden Week holiday. As of 8 AM ET, Treasuries had surrendered all their Asian session gains, bear flattening with yields .2 and 1 bps higher, while US equity futures are mixed (GOOG weighing on NASDAQ) to better ahead of the cash open.

Treasuries opened quietly but slightly better bid on soft Samsung earnings, then extended the bid on weak Chinese Manufacturing PMI (50.1 vs expected and last of 50.5) and non-manufacturing PMI (50.2 vs expected 50.9 and last of 50.8). There was Asian bank buying of 5s, central bank buying of 2s, and Asian real money buying of 5s and 7s that took Treasuries to their highs of the night in a small bull steepener on limited participation. China joining the Golden Week celebration tomorrow will only further dampen participation over the next week. Locally, Aussie bonds were better bid on month end extensions, as curve bull flattened slightly. Chinese shares led a quiet, mixed night for Asian equity markets that were open.

The bid to Treasuries held through the European open, even though better early levels for bunds and bobls quickly came under pressure on deal-related hedges ahead of Italian sovereign issuance, while concessions were built for the German schatz (2y) auction. As state CPI prints hit the tape in Germany, pressure built further on bunds and eventually Eurozone GDP took bunds into negative territory, weighing on Ts and gilts. Italian 5y supply, in two doses no less, met with decent demand, but the Italian 10y was sloppy. The schatz auction was a totally average and boring event. Better macro selling followed the Italian supply, with domestic banks also selling bobls and bunds to make room for the Italian paper, as BTPs lead a peripheral tightening (3.75 bps currently for BTPs, everything else a bit less) to core. Hedge funds have been good sellers of buxl since the CPI report, both outright and on the curve against new schatz. RV accounts have added schatz/bund steepeners, both in cash and conditionally in futures. There has been better real money paying in German 2y swaps and outright selling of German long end. Gilts have traded under pressure on talk of progress between Labour and the Tories, with RV account selling long-dated gilts, macro account selling sterling greens (L M1 and L U1 contracts primarily). Meanwhile, Treasuries saw better real money interest to receive in USD 3y swaps early in the European session, but since then have seen better hedge fun paying in USD 5y and 10y swaps. There was a block seller of 9665 FVM9 at 4:40 AM ET, a sale of $455K in DV01 for the 5y sector, adding to the $1.7MM FV sold on block yesterday. Ahead of the Chicago open, a $378K DV01 FV/TY flattener went through at 7:43 AM ET.

Today’s US calendar includes ECI at 8:30 AM ET, S&P HPI at 9 AM, Chicago PMI at 9:45, and pending home sales along with Consumer Confidence at 10 AM. Month end extensions show Treasuries extending a mundane .07 years which ironically is almost perfectly offset by the net change in Fed’s SOMA. US agencies extend .09 years, credit .05, and MBS .05. Pan-Euro aggregate extends .09 years, Pan-Euro Treasuries extend .11 years, Euro aggregate Treasuries extend .12 years, Sterling aggregate is flat, with Sterling Treasuries contracting .02 years. Asia-Pac Treasuries extend .05 years, while Japanese Aggregate Treasuries extend .04 years.

The bear steepening yesterday, on light volume we might quickly add, saw open interest decrease slightly in US, TY, and FV; of course, TU open interest had to go up again, rising another 69K (1.7%). Still have to get a better idea what is going on there. Either way, the data is consistent with maintaining a bullish view: open interest down on light volume in back up, while open interest increased Friday on good volume in the bull steepener. Let’s see how that plays out today. Still think the path of greatest pain is a bull steepening, and continue to remind everyone that we only picked at the wound last month, but the infection runs far deeper. Enough on the soap box for now. For choice today in TYM, call the range at 123-27 (again!) to 123-13. Take out 123-13 and you will make a run for 123-10/09, with support below there at 123-07+, 123-03+, 122-30+, 122-28+ (yes support everywhere!). For bulls, first issue is getting back above daily pivot at 123-16+. Take out minor objective at 123-27 (finally???, but probably not today) and resistance comes in at 124-05+, 124-15.

Have a good Tuesday,