Bonds rallied on Friday on both sides of the Atlantic, as the US payrolls report (see more below) failed to impress. The US 10-year yield plunged by almost 8bp, while the German 10-year yield fell by some 5bp. As the numbers were actually not too bad, the bond market sentiment remains rather good. Intra-Euro-zone bond spreads continued to narrow on hopes of more easing from the ECB. The Italian 10-year benchmark yield is already approaching 3%, and hit its lowest level on record on Friday.
Bonds are set to perform a bit further today, while intra-Euro-zone spreads will likely continue narrowing.
European equities ended with gains, but profit taking was seen in the US. S&P 500 finally ended the day clearly lower, down by 1.25%. Also Asian equities are trading mostly down this morning, and Europe is set to open clearly lower.
US payrolls growth accelerates, as the weather effect fades
Friday’s US employment data pointed to continued recovery in the US labour market, even though the data failed to impress the bond markets. Payrolls grew by 192k vs an upward revised 197k in February (previously 175k), while the unemployment rate stayed put at 6.7%, as the labour force increased. The unchanged average hourly earnings on a monthly level were a small disappointment. Still, April numbers could easily look quite strong, and the numbers support further tapering moves by the Fed.
ECB QE talks intensify – expectations of further action rise
The Frankfurter Allgemeine Zeitung cited an internal assessment by the ECB, which showed a quantitative easing programme of EUR 1000bn a year would lift inflation by between 0.2 and 0.8%-points in 2016. One should not read too much into the exact numbers of this assessment, but it further implies the talks about how a QE programme by the ECB could look like will intensify further. This means that the market pricing for further measures from the ECB could easily strengthen further, keeping bonds supported and spreads under narrowing potential. Several ECB speakers are set to speak today, which may create a lot of volatility, as views may differ from member to member.
Finnish government facing increasing uncertainties
Finnish Prime Minister Katainen announced over the weekend that he would not seek re-election as the head of his party and would step down as prime minister in June, and would likely seek a role at the European Commission. The announcement follows the loss of a government party last month, while the head of the second largest government party may lose her role soon, which would lead to a new finance minister as well. In addition, two current ministers are running for the European Parliament, while the issue of revising a permit to build a nuclear power plant is an increasing problem for the Greens (currently part of the government). Early elections still do not look particularly likely, but uncertainties have increased, and the path ahead for the Finnish government will certainly not be easy. Finnish bonds should at most feel only minor pressure on the news, but as the recent events increase the risk of tensions in Finnish politics, they are not at least helpful for Finland.
Calm data week – Fed minutes, Chinese data and corporate earnings on the agenda
This week’s calendar looks rather light. The highlights include the Fed minutes on Wednesday, China’s March trade numbers on Thursday and China’s inflation on Friday. In addition, the Bank of Japan will release its latest monetary policy decision tomorrow and the Bank of England on Thursday, while preliminary University of Michigan consumer confidence will have its turn on Friday.
In addition, the US Q2 earnings season will be set in motion tomorrow with Alcoa, while the large banks will start reporting on Friday.
In today’s calendar, German February industrial production will be released at 8:00 CET and Spanish data at 9:00 CET. In addition, the ECB’s Mersch will speak at 10:00 CET, Nowotny at 11:30 CET, Weidmann at 12:30 CET, Constâncio at 15:00 CET, while the Fed’s Bullard will have his turn at 17:45 CET.
Plenty of action on the auction front, including a new German linker
Plenty of bond auctions will take place this week. The Netherlands will re-open the 5-year benchmark for EUR 2 to 3bn tomorrow, while Austria will sell bonds maturing in 2023 and 2044 for a combined EUR 1.21bn on the same day. Germany will re-open its 2-year benchmark for EUR 4bn and launch a new 2030 inflation-linker for EUR 2bn on Wednesday. Ireland will auction bonds on Thursday and Italy on Friday.
In the US, USD 30bn of 3-year notes will be sold tomorrow, USD 21bn of 10-year notes on Wednesday and USD 13bn of 30-year bonds on Thursday.
Coupon and redemption payments from German bonds amount to around EUR 20bn this week.