While much of Europe was on holiday yesterday, US bonds continued to rally and the curve bull-flattened further, as fresh data suggested US GDP might have actually contracted during the first quarter of this year. The 10-year yield fell another 3bp to trade at around its lowest level since early February.
The name of the game is set to change today, and bonds take a beating (though German bond yields will open lower, mirroring the moves seen in the US yesterday), as April US payrolls data should suggest the weak Q1 is history and things look quite different for the current quarter. Higher yields and a steeper curve are thus ahead later today.
The moves on the equity markets were quite limited yesterday, while Asian markets are trading mixed this morning. Europe is set to open close to flat.
Construction spending suggests US Q1 GDP growth might have been negative – pay more attention to more recent data
The US ISM index continued to rebound for the third month in a row, climbing from 53.7 to 54.9, though it is still below the 56.5 level seen in December. The details were somewhat mixed. The new orders index stayed put at 55.1, the production index actually retreated slightly, but the employment index jumped from 51.1 to 54.7, boding well for today’s payrolls, while new export orders gained as well.
However, it was the ugly construction spending data that received more attention (spending rebounded by a modest 0.2% m/m after a downward-revised 0.2% fall in February), suggesting GDP growth in Q1 might have actually been negative (reported as 0.1% annualized q/q growth on Wednesday). Q1 is history and we know it was weak. The focus should be more on the increased momentum the US economy is currently seeing, as suggested also by yesterday’s ISM index.
Booming housing market an increasing worry for the Bank of England
The Deputy Governor of the Bank of England, Jon Cunliffe, warned that the danger signs on the UK housing market resembled a movie that had been seen before in the UK, while it would be dangerous to ignore the threat posed by the booming housing market. He added it was particularly important to ensure that the current low levels of interest rates do not mask the likely cost of mortgages and thus create more room for prices to rise. His concerns are easy to understand, as April house price data from Nationwide showed prices surging by 10.9% y/y in April, the highest number since 2007.
Higher benchmark rates by the Bank of England are naturally not the only way to restrain the housing market. For example, the Treasury could rethink its Help to Buy scheme, or the capital requirements for mortgages could be tightened. Currently, UK money markets are pricing in the first BoE hike for late Q1/early Q2 next year.
Strong payrolls to hit bonds today – Euro-zone money markets still in focus
As bad weather has been left behind, the US payrolls numbers are freer to surge higher. We haven’t seen a sizable upside surprise in the payrolls numbers since last October, so such a number looks overdue, considering the volatility of the data. A big upside surprise could easily take the US 10-year yield towards 2.80% and above in the coming days, which would open the door for another attack at the 3% level going forward. The ADP numbers earlier this week already suggested the labour market is picking up momentum, while it has been the weak Q1 data that have received too much focus in markets in the past few days.
The US April employment report will be released at 14:30 CET. Elsewhere in the calendar, the final Euro-zone manufacturing PMI will be released at 10:00 CET (Spanish data at 9:15 CET, Italian at 9:45 CET, French numbers at 9:50 CET and German ones at 9:55 CET), the ECB will announce the latest 3-year LTRO repayment data at 12:00 CET, while US March factory orders will have their turn at 16:00 CET.
Today’s Eonia fixing will also gather a lot of attention. After falling by 6bp to 40bp on Wednesday, we should see a drop to somewhere close to 20bp to really alleviate worries about the money market situation. Risks are that the drop is going to be smaller than that, though it is likely to be considerable.
Nordea