German bond yields rebounded a bit higher on Friday on the back of higher-than-expected German inflation numbers, but especially considering the very low starting point, the moves were not great. The 10-year yield edged up by less than 2bp. In the US, shorter yields actually fell, while the 10-year one moved marginally higher. Intra-Euro-zone spreads mostly narrowed.
Bonds are likely be supported today, and yields could edge a bit lower, as the quarter end, large redemption payments and worries of bank runs in Bulgaria (see more below) provide support.
The Eonia overnight rate edged back lower to 2.5bp, and considering that we are already so low ahead of the quarter end, a move into negative territory later this week is likely to be in the cards.
Equity markets ended Friday with rather limited moves. In the US, S&P 500 closed higher by 0.19%. Asian equities are trading mostly with gains this morning, and Europe is set to open slightly higher.
Bank runs in Bulgaria risk turning into something bigger
Bulgaria has currently fallen into a confidence crisis of its own, and the government is struggling to maintain confidence in the financial system and the currency, which is pegged to the euro. Two large banks were hit by deposit outflows last week, and the crisis has taken its toll on the government: early elections have been called for October. President Plevneliev has vowed Bulgaria has the resources to fight the crisis, while the central bank has promised to secure all necessary means and actions to guarantee the stability of the banks. The crisis is unlikely to spread to other EU countries, as the sources of the crisis illustrate to a large extent domestic reasons, but that does not mean it could not generate some worries of spreading. In addition, the banking system is mostly owned by foreigners, so a bigger crisis would have some direct consequences outside of Bulgaria as well.
Euro-zone inflation to remain subdued, but will not move the ECB
The week will get a brisk start with the flash estimate of June Euro-zone inflation at 11:00 CET. German numbers surprised clearly to the upside on Friday (EU harmonized number coming in at 1.0% y/y vs 0.6% the month before), while Spanish numbers were lower than expected (falling to 0.0% y/y). The higher German numbers point to upside risks for today’s Euro-zone numbers as well, but market expectations should be higher already after Friday’s data. Today’s numbers are highly unlikely to affect the ECB’s near-term plans, and the message from the central bank on Thursday is not set to include that much new, but will of course still gather plenty of interest.
Elsewhere in today’s calendar, Euro-zone May credit data will be released at 10:00 CET, the Chicago PMI at 15:45 CET and the US May pending home sales index at 16:00 CET. In addition, the Fed’s Williams will speak at 18:10 CET.
Big week ahead: US payrolls out already on Thursday
In addition to Thursday’s ECB meeting, this week’s calendar looks very heavy, though the US Independence Day holiday on Friday will limit market activity towards the end of the week. The US manufacturing ISM index will be out tomorrow, and the Markit data released earlier points to a clear increase.
The most interesting day will without a doubt be Thursday, when also US June payrolls will be released. One should pay close attention to earnings growth, as inflation pressures likely need to show more signs of picking up for the Fed to become more hawkish.
German, French and Spanish supply ahead – coupon and redemptions to support
Bigger Euro-zone countries will mainly take care of this week’s supply. Germany will re-open its 5-year benchmark for EUR 4bn on Wednesday, while France and Spain will sell bonds on Thursday. France will offer bonds maturing in 2024, 2027 and 2030 for a combined EUR 7.6 to 8.5bn, while Spain will auction a new 5-year benchmark as well as re-open a bond maturing in 2044.
Coupon and redemptions payments from EUR government bonds will amount to a huge EUR 52bn this week. Most of these will stem from German bonds, but also Italian payments will be sizable. These flows are another factor supporting the bond market in the near term.
Nordea