Bonds rallied on both sides of the Atlantic, but especially in Germany, while more bull-flattening was seen. The German 10-year yield plummeted below 1.30%, triggering stops, while weak US GDP data later gave another boost, and the yield ended the day lower by 6bp. The US 10-year yield declined by 2bp. Intra-Euro-zone spreads mostly widened.
The path is now open for the German 10-year yield to fall back to the record lows of around 1.13% seen in 2012, an as the momentum certainly looks strong at the bond market at the moment. In the near term, further geopolitical tensions and the looming quarter-end will keep bonds supported, but US price data has the potential to put at least temporary upward pressure on yields later today (see more below).
The Eonia overnight rate is creeping higher again, rising to 4bp yesterday, and is likely to rise further in the coming days due to the end of the quarter. However, as July begins, a new attack at the zero-boundary looms.
European equities fell by around 1%, but US equities actually recovered, with S&P 500 ending higher by 0.49%. Also Asian equities are trading higher this morning, and Europe is set to open slightly higher as well.
Look past the US Q1 GDP plunge – the future looks much brighter
The third release of US GDP numbers would normally not gather that much headlines, but yesterday’s data was an exception. The 1.0% annualized q/q drop was revised to 2.9%, much weaker than expected, making Q1 the worst quarter since the financial crisis (Q1 2009 was the last time GDP contracted at a faster pace). The biggest reason for the worse performance was a revision in private consumption growth from 3.1% growth to only 1.0% expansion, which was due largely to a different way of measuring healthcare spending. In addition, we know that Q1 was hit by bad weather, so overall one should not become too concerned. Growth should see a big rebound during the current quarter, but there is no question about it: Q1 was weak.
The Markit flash June services PMI, in turn, surged from 58.1 to 61.2, lifting the composite PMI to 61.1, by far the highest in the history of the series since late 2009. Near-term data in general thus clearly has the potential to surprise positively.
More signs of increasing price pressures in the US
The highlight in today’s calendar is the US May personal spending report, including the Fed’s preferred inflation measure, at 14:30 CET. May core inflation already pointed to gradually increasing price pressures, which is likely to lift the core PCE deflator as well and create some upside pressure for yields.
In other data today, US weekly jobless claims will be out at 14:30 CET. The ECB’s Weidmann will speak at 8:00 CET, BoE’s Carney at 11:30 CET, the Fed’s Lacker at 14:30 CET and the Fed’s Bullard at 19:05 CET.
EU summit unlikely to be short of drama, but market impact minor
Another 2-day EU summit will start today, with the task of discussing the high-level appointments, foremost the presidency of the European Commission. The leading candidate for the presidency, Jean-Claude Juncker, has aroused a lot of controversy, but is likely to secure the post – something many will see as step backwards.
The EU leaders will also discuss the topic of placing more sanctions on Russia, but after the somewhat more conciliatory stance taken by Mr Putin the EU is unlikely to resort to new sanctions at this point, which would be slightly soothing amidst a lot of geopolitical worries.
Nordea