Bonds continued to rally hard yesterday on both sides of the Atlantic, while curves bull-flattened further. The German 10-year yield plunged by a further 5bp to around 1.37%, while the corresponding US yield plummeted by almost 7bp. This rally now brought the US 10-year yield to its lowest level since last October.
Semi-core bond spreads took back some of their earlier widening, but Finnish bonds continued to lag in the rally. Italian and Spanish spreads vs Germany, in turn, edged wider.
The bond market has thus once again proved the bears wrong, and the recent moves illustrate that a bearish bond market sentiment just is not there yet. The big picture for the bond market is unlikely to change in the next few weeks, as presidential elections in Ukraine, the EU parliamentary elections and further easing from the ECB are looming. That said, beyond a horizon of a couple of weeks, yields could easily see a bigger move higher. Today, odds are in favour of a rebound higher in yields.
Equity markets mostly saw some profit taking for a change yesterday, but the losses came from high levels. S&P 500 retreated by 0.47%. Asian equities are mostly trading lower this morning despite positive Japanese GDP numbers (see more below), and Europe is set to open down.
More fuel to the ECB easing speculation fire
The media seems to be all over the topic of June ECB easing these days. Reuters ran a story yesterday, citing five people familiar with the discussion. According to one of the sources, a June rate cut was more or less a done deal. In addition to rate cuts, including a negative deposit rate, the package of easing measures could include targeted conditional LTROs, with maturities of more than three years, to boost lending to small businesses. One of the sources elaborated that an ABS purchase plan was an alternative to targeted LTROs, but it would not be ready to be announced in June.
Expectations are thus building for big-time June easing, and the more expectations increase, the bigger the risk of an eventual disappointment. It looks quite clear the ECB will deliver in June, but it will have a hard time exceeding the growing expectations. June meeting is not around the corner yet, so there is still plenty of time to speculate on the outcome.
Japanese GDP surges – outlook still clouded
Japanese GDP surged by 5.9% q/q annualized in the first quarter of the year, clearly above expectations. Consumer spending ahead of the sales tax increase in April expectedly boosted growth, but it was a strong jump business spending that brought growth much higher than expected. The GDP deflator, in turn, continued to climb, but at 0.0% y/y is still pointing to rather modest price pressures. At least the direction is right.
Despite the better-than-expected Q1 data, one should not get carried away. Q2 in the aftermath of the sales tax hike is likely to lead to a clear contraction in GDP, and the government needs to increase its efforts in terms of structural reforms. So far, the government’s track record in terms of structural reforms has been disappointing.
More than spare change
Italy followed in the footsteps of Spain in amassing a huge order book for its new 15-year benchmark, maturing in 2030. The size of the issue was fixed at EUR 7bn on the back of an order book of more than EUR 20bn. Such book size certainly suggests that even at current levels Italian bonds continue to gather plenty of demand.
Euro-zone GDP and US inflation ahead – French GDP numbers weak
It is the middle of May, and now also Euro-zone officials have managed to calculate the national accounts from the first quarter of the year. French numbers just printed at 0.0% q/q, below expectations and after a downward revised 0.2% q/q growth in the last quarter of 2013. The French economy thus continues to perform poorly.
German numbers will be released at 8:00 CET, Italian data at 10:00 CET and Euro-zone numbers at 11:00 CET. GDP growth likely accelerated clearly from the 0.2% q/q seen in the last quarter of the year, putting Euro-zone growth on a more stable footing. Final April inflation numbers for the Euro zone will also be out at 11:00 CET.
In the US, the highlight will be the April inflation numbers at 14:30 CET. The New York Fed manufacturing index and weekly jobless claims will be out at the same time, March capital flows at 15:00 CET, April industrial production at 15:15 CET and the Philly Fed & NAHB indices at 16:00 CET.
In addition, the ECB’s Constâncio will speak at 9:10 CET, Mersch at 10:50 CET and the Fed’s Yellen at 0:10 CET (early Friday).
Supply continuing with French auctions
This week’s heavy bond supply will continue today. France will sell 2-, 3- and 5-year nominal bonds for EUR 7-8bn. In addition, the country will re-open inflation-linked bonds maturing in 2018, 2019 and 2024 for a combined EUR 1 to 1.5bn.
Nordea