Core bond yields tried higher again early yesterday, but in the afternoon weak US retail sales (see more below) gave bonds a boost again. The German 10-year yield finally ended the day lower by 1bp. Intra-Euro-zone spreads widened, and especially Spanish bonds felt pressure from the new EUR 9bn 10-year benchmark (order books at 18.5bn).
The US rally accelerated in the evening on the back of a strong 30-year auction and tensions in Iraq. The 30-year year yield was actually the one seeing the biggest drop (almost 6bp), while the curve bull-flattened. The US 10-year yield fell by some 4bp back below 2.60%.
German yields will open lower this morning, but yields are likely to give somewhat higher levels another try later today. However, the looming weekend and the ongoing tensions in Iraq should limit the move.
The Eonia overnight rate fell to just 4.3bp, the lowest on record.
Equities were almost flat in Europe but fell in the US. S&P 500 retreated by 0.71%. Asian equities are trading mixed this morning, while Europe is set to open clearly lower.
China’s May data batch, just released, came close to expectations. Retail sales growth came in slightly above expectations, showing a pick-up from 11.9% y/y to 12.5%, the first increase in the growth rate in four months.
US retail sales disappoint
US retail sales were disappointingly weak in May. Core retail sales (ex. autos, building materials, gasoline and food services) were flat m/m, though the upward revision from a 0.1% m/m contraction to 0.2% gain offered some consolation. This was still enough to lift the 3m/3m annualized growth rate in core sales to 5.0% from 3.2%. Hopes still are that consumption growth will pick up in the months to come, but the May retail sales data was a small blow to such hopes.
Portugal skips the last bailout tranche – the economy faces considerable risks
Portugal decided to turn down the final EUR 2.6bn payment in its bailout programme, in order not to have to meet a deadline of 30 June to impose additional austerity measures. The country needs to find compensating measures, as the constitutional court once again ruled that planned cuts in public sector pay were unconstitutional last month. The decisions by the constitutional court are very problematic for Portugal: if the court basically rules out a major part of the planned spending cuts, taxes will have to rise even more, which will hit the economy hard. Legal challenges thus pose considerable risks for the Portuguese outlook.
BoE’s Carney warns of looming rate hikes
Bank of England Governor Carney warned yesterday that interest rates could start rising sooner than markets currently anticipate. The warning came after Chancellor Osborne had just given the BoE’s Monetary Policy Committee new powers to curb the booming housing market, but Mr Carney argued macroprudential policy was not a substitute for monetary policy. However, Carney continued to play down the eventual pace of policy tightening, saying rate hikes would be gradual and limited. Markets currently price in the first BoE move around April next year, but Carney’s comments suggest the Bank could move earlier.
Eyes on LTRO repayment data
Today’s economic data offering looks rather light. US May PPI will be out at 14:30 CET and preliminary June University of Michigan consumer confidence at 15:55 CET. More interesting will be the LTRO repayment data at 12:00 CET, which will show the first reaction to last week’s easing package. A high number would imply the liquidity injection due to ending the SMP sterilizations could prove to be a rather short-lived one. In addition, the ECB’s Linde will speak at 9:30 CET.
On the ratings front, Moody’s has a chance to review its rating on Italy, and Standard & Poor’s on the UK. No rating changes are likely to be in the cards.
Finnish bonds still face political risks – a new Prime Minister selected tomorrow
In Finland, around 850 members (yes, 850) of the National Coalition Party will pick the next Finnish Prime Minister tomorrow, as Jyrki Katainen will step down. Alexander Stubb, who was just voted to the European Parliament with the most votes among Finnish candidates, has led the public polls, but this time the Prime Minister is not selected by the public. Once the new Prime Minister is in place, mini government negotiations will follow. These will be interesting, not least because the new leader of the second largest government party has called for more stimulus measures. Political uncertainty thus continues to be a risk factor for Finnish bonds.
Nordea