German bunds surge ahead of October manufacturing PMI, ECB policy rate decision

The German bunds surged Monday as investors wait to watch the country’s manufacturing PMI for the month of October, scheduled to be released on October 24 by 07:30GMT. Also, markets await the European Central Bank’s (ECB) monetary policy decision, to be unveiled on October 26 by 11:45GMT.

The German 10-year bond yields, which move inversely to its price, slumped nearly 2 basis points to 0.43 percent, the yield on 30-year note slid nearly 1-1/2 basis points to 1.24 percent and the yield on short-term 2-year traded 1 basis point lower at -0.72 percent by 08:30GMT.

The main economic event in the coming week will be the ECB Governing Council meeting, where a change in policy settings is expected to be announced.  According to recent reports, some ECB policymakers see the limit to their potential bond-buying at roughly EUR2.5 trillion. And so, with purchases set to surpass EUR2.25 trillion by year-end, the discussions will likely center on the appropriate pace and time period to conduct purchases of the EUR250-300 billion of bonds available before running up against the programme’s self-imposed constraints.

And faced with a choice of a small reduction in purchases, but thereby hitting the constraint more quickly, or a larger reduction, allowing purchases to continue for a longer period, the Governing Council is likely to conclude that a relatively longer intended purchase horizon and thus a somewhat greater reduction in the pace of buying might be considered the more dovish option, not least that would push back the timing of the first rate hike.

Data-wise, the week will be dominated by a flow of economic survey results for October, which kicks off today with a flash release of the Commission’s consumer confidence indicator. In September it reached -1.2, the highest level since early 2001, and further modest improvement is expected in October.  And the German GfK consumer sentiment and Italian ISTAT economic sentiment indices are due Thursday.

In addition to those monthly survey results, the ECB’s Q3 quarterly Bank Lending Survey is also scheduled for Tuesday, while October bank lending data will be released on Thursday. In the bond market, Germany will sell 10Y Bunds on Wednesday and Italy is scheduled to sell bonds the following day.

Meanwhile, the German DAX traded 0.07 percent higher at 13,000.50 by 08:35 GMT, while at 08:00GMT, the FxWirePro's Hourly Euro Strength Index remained neutral at 24.46 (higher than +75 represents bullish trend). For more details, visit http://www.fxwirepro.com/currencyindex

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