Bond yields rose yesterday and curves steepened, modestly in German yields but more so in the US. The US 10-year yield leaped 5bp, bringing the yield back to above 2.50% (but only to levels seen early last week).
Intra-Euro-zone spreads mostly narrowed. Portuguese bonds were the exception, as Portugal faced pressure following the earlier decision by the Portuguese Constitutional Court to reject yet another round of spending cuts.
Soft Euro-zone inflation data looks likely to keep bonds supported today and push yields a bit lower again (see more below).
Equity prices rose modestly yesterday, and the positive mood has mostly been extended into Asian markets overnight. Europe is still set to open slightly down today.
Exciting ISM turns into less excitement
53.2, no wait, we meant 56.0 – on second thought, let’s go for 55.4. That was pretty much the story with the release of the US manufacturing ISM index yesterday, which was reported incorrectly not once but twice, before the (hopefully) correct number was published. The initially reported fall from 54.9 to 53.2 looked odd, while the eventual number of 55.4 was largely in line with expectations. Among the details, the production index surged from 55.7 to a 5-month high of 61.0, while the new orders index improved from 55.1 to 56.9. The employment index was a small disappointment, retreating from 54.7 to 52.8.
Overall, the numbers support the picture of the US economy regaining momentum after weather-related weakness early this year, but the message was overshadowed by the blunders relating to the release of the data, which expectedly lead to some market volatility as well. Let’s hope the ECB can get its message straight on Thursday on first try – otherwise, we will likely see much bigger volatility compared to yesterday.
Falling inflation an increasing problem even in Germany
Yesterday’s German inflation numbers for May were yet another reminder that price pressures in the Euro zone are currently very subdued, even in the somewhat stronger economies like Germany. German inflation, measured by the EU harmonized prices, fell from 1.1% y/y in April to only 0.6%, the lowest number since early 2010, significantly below expectations. These numbers point to a very soft Euro-zone number as well (see more below), and will add pressure for the ECB to further spice up the easing package in store on Thursday.
Soft Euro-zone inflation to keep bonds supported
The highlight in today’s calendar will be the flash estimate of Euro-zone May inflation at 11:00 CET. Italian, Spanish and especially the German numbers already printed on the soft side, delivering another reminder that momentum for Euro-zone inflation continues to be weak. Risks are thus clearly tilted to the downside regarding today’s numbers. A fall back to 0.5% y/y looks likely, while a multi-year low of 0.4% would not be a huge surprise either. Even though expectations have no doubt fallen after especially yesterday’s German data, today’s inflation numbers are set to be another factor supporting bonds ahead of the ECB.
Elsewhere in the calendar, the ECB will release the allotment of its latest main refinancing operation at 11:15 CET, US April factory orders will be out at 16:00 CET, while the Fed’s George will speak at 19:50 CET.
Nordea