Markets did not stabilize yesterday, not even close, but the huge rally in core bonds only picked up steam. Curves bull-flattened further, and flight-to-safety was the name of the game. The German 10-year yield plunged by another 6bp to touch 1.30%, the lowest in a year, while the US 10-year yield fell by around 5bp to below 2.50% for the first time since last October.
US Treasury yields have shown some signs of stabilization overnight, but that was the case also yesterday, and the outcome was something totally different. At least a small rebound higher in yields looks overdue, but it may not be wise to try to catch a falling knife, especially ahead of the weekend. As a reference, the German 10-year yield is currently around 20bp higher than the record-lows seen in 2012.
Euro-zone bonds outside the semi-core were really hammered. Italian and Spanish 10-year yields actually rose by 15-20bp, meaning spreads exploded by up to 25bp! We have not really seen such moves since last summer. Semi-core spreads vs Germany widened as well, and Finnish bonds continued to underperform. Yesterday’s moves are unlikely to mark a reversal of the spread narrowing trend, but some cautiousness is certainly warranted in the near term.
Equities recorded broad losses as well, though the moves could easily have been even larger. In the US, S&P 500 closed lower by 0.94%. Asian equities are trading mostly lower this morning, except for India, which has recorded gains of more than 4% on the back of early election result showing a big win for the opposition BJP.
US core inflation started to climb – other data more mixed
US inflation excluding food and energy printed at 0.2% m/m in April, slightly higher than expected. This was enough to lift the annualized 3m/3m rate from 1.6% to 1.8%. The y/y rate, in turn, climbed to an 8-month high of 1.8%. The Fed’s preferred inflation measure, the core PCE deflator, has continued to point to more modest price pressures, but should gradually pick up momentum as well, easing the Fed’s worries about inflation being too low.
In other US data, initial jobless claims printed at 297k, the first number below 300k since 2007. Also the regional manufacturing indices had a positive message to convey. The New York Fed manufacturing index jumped from 1.29 to a 4-year high of 19.01, while the Philadelphia Fed index retreated marginally from 16.6 to 15.4, but stayed at a healthy level.
Among worse data, US industrial production fell by 0.6% m/m in April, but we would not be too concerned about this in light of the positive confidence numbers. More worrying was the further drop in the NAHB housing market index to 12-month low of 45, suggesting the housing market recovery is still facing obstacles.
Euro-zone growth disappointments with a comeback
Euro-area Q1 GDP numbers printed at 0.2% q/q, clearly weaker than hoped. This marked the fourth quarter of growth in a row, implying the economy is not on the verge of another recession. However, the subdued pace of growth is certainly disappointing in light of the more positive business surveys, and strengthens the case for the ECB to do more to support the recovery.
US dataflow continuing – Finnish rating on review
Today’s US data calendar still has a few interesting releases to offer ahead of the weekend. April building permits and housing starts will see daylight at 14:30 CET, while the preliminary May University of Michigan consumer confidence will have its turn at 15:55 CET.
In addition, the ECB’s Coure will speak at 11:30 CET and the Fed’s Bullard at 18:20 CET, while the ECB will release the latest LTRO repayment data at 12:00 CET.
On the ratings front, DBRS has a chance to review its stable outlook on the Finnish AAA rating. An affirmation of the outlook would not cause big headlines, and is the likely outcome, but a negative outlook would deliver more bad news for Finnish bonds. Moody’s, in turn, will review its stance Ireland, and could easily deliver an upgrade from the current Baa3 rating (currently with a positive outlook). Fitch already affirmed its stable outlook on its AA rating on the country this morning.
Finally, Portugal will exit its bailout programme tomorrow, being the second country after Ireland to have made a clean exit. The exit will by no means mean that the challenges for Portugal would now be behind.
Nordea