Longer German bond yields continued to rise yesterday and the curve steepened some more. The 10-year yield ended the day higher by about 2bp, leaving the 10-year benchmark yield roughly at its highest level in three weeks. US Treasury yields saw smaller moves, and ended the day close to unchanged. Intra-Euro-zone spreads saw only limited changes. Trading volumes were high for the second day in a row, implying there was willingness to take a stance ahead of the ECB.
Upward pressure on yields is set to continue today, and the curve has more steepening potential. The ECB’s message is naturally the obvious market mover (see more below).
Equity markets saw rather modest moves. In the US, S&P 500 rose by 0.19% to end at fresh record highs. Asian markets are trading mixed this morning, while Europe is set to open close to unchanged.
ADP survey points to a slowdown in job creation
The US ADP employment survey came in at a disappointing 179k in May, down from 215k the month before and a four-month low. The report puts downside risks to tomorrow’s official employment numbers, but also lowers expectations, and thus makes an upside surprise in Friday’s data more likely. After all, the ADP survey is far from being a perfect guide to the official data.
The non-manufacturing ISM index, in turn, rose from 55.2 to a 9-month high of 56.3, a positive sign. The new orders index climbed to a high 60.5 level, while the advance in the employment index from 51.3 to 52.4 still leaves it on a rather disappointing level.
Euro-zone expansion to weaken even the German position in the ECB?
The European Commission announced yesterday Lithuania had fulfilled all the requirements for becoming the 19th member of the Euro zone from the start of next year. Its membership would also have consequences on how the ECB Governing Council operates, as the European Treaty stipulates the voting system within the ECB will change, once the number of national central bank governors exceeds 18. The new system would introduce a rotation of voting rights among the national central bank governors, while the Executive Board members would retain their right to vote every time.
Governors from the larger countries would still vote more often than the ones from the smaller countries, but the change would mean that e.g. the Bundesbank president would not have vote at every meeting. The change will raise a lot of discussion, likely especially in Germany, but it should have few consequences in practice. All the governors would still participate in the discussions, and it seems far-fetched to think that the Governing Council would push through a certain type of policy at a meeting, in which an influential governor opposing such a move was not allowed to vote. The change will no doubt gather a lot of headlines, though.
ECB, what do you have to offer?
The much awaited June ECB meeting has finally arrived. The central bank should deliver a whole package of easing measures, including rate cuts, a conditional refinancing operation and more liquidity support. Such a package should support a further rise in long yields and a steeper curve in a classic buy the rumour, sell the fact move.
However, it is worth remembering the words of Executive Board member Mersch:
We are working on a broader range of instruments that might even strike the most fertile imagination of journalists or analysts. If he is right, then there will be a lot of surprises in store. However, longer bonds would not necessarily do well in a scenario where the ECB clearly exceeds expectations either. After all, an aggressive ECB should lift inflation expectations and boost hopes towards a real economic recovery.
The ECB will release its interest rate decision at 13:45 CET, while the more interesting press conference will start at 14:30 CET.
Elsewhere in the calendar, German April factory orders will be released at 8:00 CET, the Bank of England will release its monetary policy verdict at 13:00 CET, US jobless claims will be out at 14:30 CET, US household Q1 net worth data at 18:00 CET, while the Fed’s Kocherlakota will speak at 19:30 CET.
New 10-year French benchmark and Spanish auctions ahead
France will launch a new 10-year benchmark, maturing in the November of 2024, today, while it will re-open 8- and 15-year bonds for a total of EUR 7.5 to 8.5bn. These auctions should put slight upward pressure on yields already early in the day. Spain, in turn, will offer bonds maturing in 2017 and 2019 for a combined EUR 3.5 to 4.5bn.
Nordea