After several rounds of pounding, the German 10-year yield finally breached the support at 1.50%, ending the day at around 1.47%, down some 5bp for the day – a bullish signal. Curves bull-flattened and intra-Euro-zone bond spreads mostly narrowed, an illustration of the resilience of the trend of narrowing spreads. US Treasury yields ended yesterday only moderately lower, as a rebound in equities dented the demand for bonds.
European equities took another 1% beating, but US equities (S&P 500) closed higher by 0.68% on the back of a late rally. Asian equities are trading higher this morning, though mostly in Japan, after Chinese GDP slowed less than feared (see more below). European equities are set to open clearly higher this morning.
Even though the break lower in the German 10-year yield is a bullish signals, and the momentum for bonds looks good, yields are likely to edge higher today after yesterday’s big fall. In the US, a break below the February low of 2.57% in the 10-year yield would be another bullish signal.
Q1 effect hits Chinese GDP numbers again
Chinese economic growth slowed to 7.4% y/y in Q1, down from 7.7% in the last quarter of 2013 and the slowest rate in 1.5 years. Still, the slowdown was expected and the numbers were actually a tenth higher than the median analyst estimate. The numbers support the notion that Chinese growth is slowing, but this should not be a surprise to anybody at this point any more, and the Q1 GDP data should not create new fears regarding an abrupt slowdown in China. Moreover, Q1 GDP tends to under-deliver in China relative to other quarters (in the past 14 years, Q1 GDP has accounted for only some 21% of annual GDP vs. about 32% for Q4), while the mini stimulus introduced in early April implies growth will not be allowed to slow too much.
Ukraine’s military starting to use force
Ukraine’s military finally started its operation to regain control in parts of the country controlled by pro-Russian separatists yesterday, boosting the demand for bonds. So far, between one to three injuries have been reported, depending on the sources. Worryingly, there were reports that local civilians would be acting as human shields for the armed separatists. Russian Foreign Minister Lavrov warned that it was unacceptable to use force to sort out the current situation. Risks are thus mounting that if the clashes turn very violent, Russian forces would step in, which could lead to a full-blown conflict between Russian and Ukrainian forces. Such a course of events would have major consequences also outside these countries. The delicate situation will limit the near-term upside potential in bond yields.
US core inflation bottomed out?
US inflation numbers for March came in slightly higher than expected. The headline saw a jump from 1.1% y/y to 1.5%, largely due to base effects, while inflation excluding food and energy printed at 1.7% y/y from 1.6%. Core inflation is slowly picking up momentum again, and is likely to continue to creep higher going forward, gradually alleviating the concerns caused by low inflation at the Fed.
Euro-zone inflation and US housing market data ahead – Germany to sell 10-year bonds
Final Euro-zone inflation numbers have not usually gathered much attention, but all that has changed as inflation is currently at levels causing increasing headache for the ECB. Though a further revision lower does not look likely, it would give bonds another boost. The numbers will be released at 11:00 CET.
In the US, the calendar includes March building permits and housing starts at 14:30 CET, industrial production for the same month at 15:15 CET and the Fed’s Beige Book at 20:00 CET. In addition, the Fed’s Stein will speak at 14:30 CET, Lockhart at 18:00 CET, Yellen at 18:25 CET and Fisher at 19:25 CET.
On the issuance front, Germany will re-open its 10-year benchmark for EUR 4bn.
Nordea