Bonds took a beating and curves bear steepened yesterday on the back of an upside surprise in US inflation (see more below). Both US and German 10-year yields jumped by around 5bp, with the US yield rising close to its highest in a month. Intra-Euro-zone spreads narrowed modestly.
Yields have more upside potential today in the aftermath of the Fed (see more below).
Equities produced some gains yesterday on both sides of the Atlantic. S&P 500 rose by 0.22%. Asian markets are trading mixed this morning, while European markets are set to open up.
Inflation pressures finally mounting in the US
US May inflation surprised to the upside. Headline inflation rose from 2.0% y/y to 2.1%, while excluding food and energy, the pace of price increases picked up from 1.8% y/y to 2.0%. Looking at the 3m/3m annualized core inflation, there was a jump from 1.8% to 2.3%, the highest in almost two years. The Fed’s preferred inflation measure has so far shown more modest price increases, but has started to pick up as well lately. Inflation pressures are thus building in the US economy, and the first Fed hike getting closer.
China’s housing market cooling – rising corporate defaults the bigger risk
Fresh data showed new home prices fell in 35 of the tracked 70 cities in May compared to the previous month for the first time in two years. Prices fell in e.g. Shanghai and Shenzhen, while they still rose in Beijing. Compared to the previous year, prices still rose by 5.6% y/y. The cooling house price inflation will increase worries of a bigger slump in the Chinese market, but it is the rising corporate defaults that are posing the bigger risk.
Euro-zone liquidity to jump today
Euro-zone excess liquidity will jump today, as almost EUR 109bn will be released due to the discontinuance of the SMP sterilization operation. Yesterday’s demand at the main refinancing operation totalled around 39bn less than the maturing amount, so today’s net liquidity injection will amount to around EUR 70bn. This may very well be enough to push the Eonia overnight rate into negative territory for the first time ever.
Fed’s higher rate path to take the markets by surprise – again
The absolute highlight in today’s calendar will be the Fed’s message. The statement and the new Fed forecasts will be released at 20:00 CET, while Chair Yellen’s press conference will start at 20:30 CET. The Fed’s upward-revised interest rate forecasts, or the dot chart, took the markets by surprise in March, and even though Yellen tried her best to play down the significance of the forecasts, bonds took a big beating. Another upward revision could easily be in the cards today as well, delivering another blow to bonds. Another USD 10bn tapering move should not surprise anybody.
Elsewhere in the calendar, Bank of England minutes will be released at 10:30 CET (and there will be plenty of speeches from BoE members), while the former Fed Chairman Bernanke will speak at 19:45 CET.
Spanish and German auctions ahead – Cyprus to return
This week’s bond auctions will really start today. Germany will re-open its 10-year benchmark for EUR 5bn. Spain, in turn, will tap bonds maturing in 2017 and 2019 for a combined EUR 2 to 3bn.
Finally, Cyprus is likely to price its 5-year EUR benchmark today. Initial price thoughts were in the area of 5%.
Nordea