Bonds continued to perform early on Friday, but some profit taking was seen later in the day. German bond yields finally ended the day slightly higher, while US yields rose a bit more, the 10-year one by some 4bp. Intra-Euro-zone bond spreads mostly narrowed, and the Portuguese 10-year yield was briefly trading below 4% for the first time since early 2010.
Equities gained on Friday, especially in Europe, while in the US S&P 500 advanced by 0.46%. Asian equities, in turn, are trading mostly slightly up this morning, and also Europe is set to open slightly up this morning.
Friday’s market reaction suggests some further profit taking today. However, with risks to the downside in Euro-zone inflation numbers (see more below) and the quarter end at hand, bonds could easily squeeze some further gains.
Pressure for Mr Hollande increasing further
The ruling French Socialists took a beating in the second round of French local elections yesterday, with preliminary numbers showing the Socialists taking less than 41% of the vote, with their allies, while the main opposition UMP and their allies got around 46%. The far-right National Front scored some 7% of the vote, taking around 15 towns but still leaving it as a minor force on the local level, though things might look quite different in the elections for the European Parliament in May.
The election setback will increase pressure on President Hollande to shuffle his government, something that could take place already today. There is also an increasing temptation for the President to do even less regarding structural reforms and spending cuts than he has already promised – something that would be very unfortunate for the French economy. The INSEE statistics office confirmed earlier today that the government missed its target for public-sector deficit last year, with the deficit landing at 4.3% of GDP vs the target of 4.1%. Going forward, risks remain tilted towards slower fiscal consolidation than being agreed with the EU.
Spanish inflation back to negative territory – also German numbers soft
The EU-harmonised measure of Spanish inflation fell back to negative territory in March, from 0.1% y/y to -0.2%, the lowest number since late 2009 and much lower than expected. German EU-harmonized inflation, in turn, retreated from 1.0% y/y to 0.9%, the lowest in almost four years.
These numbers should raise further worries at the ECB, and put clear downside risks to today’s number for the Euro zone as a whole (see more below).
Euro-zone sentiment improving – Finland lagging
The Euro-zone economic sentiment indicator climbed to 102.4, the highest since the summer of 2011 and pointing to a continued recovery. Among the individual countries, German confidence is at 2.5-year highs, Italian sentiment rose to above 100 for the first time since mid-2011, Spain recorded its best reading since 2007, while Greece saw the highest level of confidence in more than 5 years.
Not everybody is doing so great, as Finnish sentiment seems to be lagging clearly, being overtaken by Cyprus and at 93.3, having the second lowest confidence within the EU (Luxembourg has the weakest sentiment).
Brace yourself: Euro-zone inflation, ECB, payrolls
The first week of the month is here again, with all the excitement it brings. It all starts today with the Euro-zone March inflation numbers at 11:00 CET. Risks clearly tilted towards an even lower number than the 0.7% y/y print seen in February, which would lift hopes of more action from the ECB on Thursday. However, expectations for today’s inflation print were already lowered by the soft Spanish and German data.
In the US, all eyes will be on the March employment report in Friday, which could easily surprise to the upside and send bond yields higher. Also tomorrow’s manufacturing ISM will gather plenty of interest.
In addition to the Euro-zone inflation data, today’s calendar includes the Chicago PMI at 15:45 CET and the Dallas Fed manufacturing index at 16:30 CET. In addition, the Fed’s Yellen will speak at 15:55 CET.
German, Spanish and French auctions ahead
This week’s Euro-zone auction calendar will concentrate on Wednesday and Thursday. Germany will re-open its 5-year benchmark for EUR 3bn on Wednesday, while Spain and France will sell bonds on Thursday. France will sell 7-, 10- and 30-year bonds for a combined EUR 6.5 to 7.5bn, while Spain will auction bonds maturing in 2019, 2024 and 2026.
A coupon and redemption payment of some EUR 15bn should boost Italian bonds this week.
Nordea