Bond yields continued to climb yesterday on both sides of the Atlantic, as hopes grew that the US labour market recovery would be picking up again. Curves bear-steepened, while the 10-year spread between the US and Germany hit its highest level since 2006. The US 10-year yield ended the some 5bp higher at close to 2.80%, very close to the upper end of its 2-month trading range (2.82%). A break higher looks likely, but not before a strong payrolls report tomorrow.
The German 10-year yield climbed some 4bp to rise above 1.60%, which does not yet put it near the upper end of its recent trading range. The yield thus has more room to rise today, as the ECB refrains from further easing (see more below). Intra-Euro-zone spreads narrowed.
Equities recorded further gains, but the moves were limited. S&P 500 rose by a further 0.29% to end at fresh record-highs. Asian equities are trading mixed to higher this morning, and Europe is set to open slightly up.
China ramps up stimulus
China’s Prime Minister Li outlined a mini-stimulus package yesterday, including accelerated railway construction and extended tax breaks to small businesses. The measures do not mark any big change in policy, nor should one expect them to provide any big boost to growth. Nevertheless, the measures illustrate that the Chinese government remains committed to hitting its growth target of around 7.5% this year, though risks remain tilted to the downside.
Last year’s Fed dissenter now expects rather quick rate hikes
The Fed’s Bullard (currently non-voter) said he expected rate hikes to start in the first quarter of 2015, and the fed funds target rate could be raised to 4% by the end of 2016. This makes Mr Bullard’s rate path the second most hawkish among FOMC participants (the median being a funds rate of 2.25% by the end of 2016). Still last June, Mr Bullard dissented to the Fed’s statement on the grounds that it did not sufficiently acknowledge the Fed’s commitment to defend its inflation goals in light of the low inflation readings seen. Mr Bullard has not totally forgotten his worries towards low inflation, and noted another step lower in inflation could lead to slower tapering. Mr Bullard’s stance is an illustration that as conditions change, opinions may shift rather rapidly. Still, the most likely course for the Fed is a gradual removal of accommodation.
ADP supporting the picture of a recovery in employment growth
The US ADP employment survey printed at 191k, roughly in line with expectations, while the February advance was revised from 139k to 178k. The March number brought employment gains roughly back to the level seen in December, but clearly short of the 245k advance of November. The numbers raised expectations ahead of tomorrow’s payrolls report, but the risks are still on the upside.
Inaction to lead to some action
The ECB is unlikely to take new easing measures today, despite the low inflation print seen in March. If the ECB refrained from easing last month, when it could have easily justified more action, it would be surprising, if it did something today. After all, the currency has not seen a further marked strengthening, inflation expectations have fallen only modestly since the last meeting, money market tensions have not increased that much, while the development of confidence indicators has still been relatively positive.
The message of inaction should be only a minor disappointment, as easing expectations have already been pared back before the meeting. Still, yields and rates are likely to rise in response to the ECB’s message.
The ECB will release its monetary policy decision at 13:45 CET, while the press conference is set to start at 14:30 CET.
Elsewhere in the calendar, final March services PMI for the Euro zone will be out at 10:00 CET, UK services PMI at 10:30 CET, Euro-zone retail sales at 11:00 CET, weekly US jobless claims and February trade balance at 14:30 CET and the non-manufacturing ISM index at 16:00 CET.
Spanish and French auctions ahead – more upward pressure on yields
Today will offer plenty of action also on the auction front. Spain will sell bonds maturing in 2019, 2024 and 2026 for a total of EUR 4.5 to 5.5bn. France, in turn, will auction 7-, 10- and 30-year OATs for a combined EUR 6.5 to 7.5bn. These auctions should keep some upward pressure on yields.
Nordea