Bond yields fell further on both sides of the Atlantic on Friday despite a jump in US payrolls growth (see more below), as worries related to escalating tensions in Ukraine supported flight-to-safety demand (42 people were reported killed and 125 injured in Odessa on Friday). At around 1.45%, the German 10-year yield is at its lowest in almost a year, while the US 10-year yield fell below 2.60% to trade at its lowest since early February. The short end of the US yield curve ended the day higher, however, and the curve flattened.
The Eonia overnight day slumped from 40bp to just 16bp, alleviating worries over money market tensions further after fresh liquidity injections last week, and easing the pressure on the ECB to act this week. The ECB announced on Friday that this week’s LTRO repayments would amount to only EUR 1.75bn, sharply lower than the EUR 9.6bn repaid last week.
The Spanish 10-year yield fell below 3% for the first time since 2005, a level that would have seemed unimaginable just few years ago, and is now trading close to the lowest on record.
Yields are likely to rise today, as the better payrolls numbers are still fresh in memories, while the situation in Ukraine does not appear to have deteriorated further over the weekend. Trading volumes will be low, though, due to the UK holiday. The tensions between Ukraine and Russia are not likely to fade any time soon though, which will limit the near-term upside potential for yields.
Equities ended the week on a soft note, with e.g. S&P 500 closing lower by 0.13% on Friday. Asian equities are trading mostly down this morning as well, and Europe is set to open slightly lower.
US payrolls surge on the headline level – don’t the markets care anymore?
April US employment data supported the notion that the labour market is doing better again, but the details left something for both sides. Payrolls grew by 288k, the best number since early 2012, while the previous two months were revised higher by a combined 36k, much better than expected. The unemployment rate, in turn, plummeted from 6.7% to 6.3%, the lowest in more than five years. However, on the weaker side, the drop in the unemployment rate was all due to a huge drop in the labour force, hourly earnings were flat, as was the average workweek.
The damage the report did on the bond markets was rather limited, suggesting the sensitivity to an individual US labour market report would have decreased. This would make sense especially as the Fed has also indicated it would look at a broader range of indicators in determining the future course of its monetary policy (and would make sense purely because the monthly data is so volatile, though this has never seemed to be an issue). At this specific case, the increasing geopolitical tensions ahead of the looming weekend certainly were significant as well, as were some of the weaker details. As a result then, even though the market sensitivity to an individual US labour market report has probably decreased to some extent, the report should be a notable market mover going forward as well.
More soft ECB and Fed words as well as Chinese data ahead
The highlights in this week’s calendar include the ECB meeting on Thursday, where concrete action will likely once again be limited, and Chinese April trade data on the same day. In the US, the main focus will be on Fed Chair Yellen’s testimony to the Joint Economic Committee on Wednesday.
In today’s calendar, the Euro-zone March PPI will be released at 11:00 CET and the US non-manufacturing ISM at 16:00 CET, while the European Commission will release its Spring forecasts at 11:00 CET and the ECB’s Mersch will speak at 18:00 CET.
In addition, the Eurogroup of Euro-zone finance ministers meet, and will be joined by their non-euro colleagues to discuss the Single Resolution Fund later. Among the topics discussed will be Portugal, as Prime Minister Pedro Passos Coelho announced yesterday his country would exit its bailout without the safety net of a precautionary credit line, as Ireland did earlier.
New German 5-year benchmark and plenty of other supply in store
This week’s calendar has a lot to offer in terms of bond auctions. Austria will re-open bonds maturing in 2018 and 2034 for a combined EUR 1.1bn tomorrow, while Germany will auction a new 5-year benchmark for EUR 5bn on Wednesday. Spain will re-open bonds maturing in 2017, 2020 and 2028 and Thursday, while Ireland will sell bonds on the same day.
In the US, USD 29bn of 3-year notes will be offered tomorrow, USD 24bn of 10-year notes on Wednesday and USD 16bn of 30-year bonds on Thursday.
Nordea