The much stronger than expected US ADP jobs pushed safe haven bond yields clearly upwards. 10-year US Treasury yield jumped 6bp to 2.63%, whereas the 10-year German Bund yield went up 4bp to 1.29%. The dovish message from Ms Yellen supported risk taking and left this time around government bonds bleeding.
Today’s calendar is filled with events. ECB rate decision is unlikely to be a game changer, whereas in Sweden Riksbank will cut rates today. US payrolls are scheduled at the same time with the press conference led by ECB’s Mr Draghi as US markets are closed for the Fourth of July tomorrow.
After yesterday’s strong ADP, expectations for the payrolls have inched clearly higher. A spot on forecasted figure is unlikely to suffice to keep yields edging higher with this speed with the day off looming tomorrow.
This morning Chinese official non-manufacturing PMI printed slightly lower at 55.0 vs expected 55.5 adds a cautious twist to the sentiment.
Bubble? Not my concern
Fed’s Yellen played down fears of Fed hiking rates to counteract building bubbles. In her speech at the IMF yesterday Yellen said: “I do not presently see a need for monetary policy to deviate from a primary focus on attaining price stability and maximum employment, in order to address financial stability concerns”. Instead Yellen favours regulation and supervision to make financial sector more resilient.
With financial markets skyrocketing the BIS already commented that rates should be hiked to control speculation. Yellen’s more dovish stance was greeted with souring stock markets. We feel that regarding Fed policy the employment figures are still the key.
High hopes for payrolls
Surprisingly strong private sector ADP employment report showed the US added 281k private sector jobs in June, well ahead of the consensus of 200k.
After the high ADP, the market is geared for higher payrolls and low figures would be met by lower yields and dollar. We expect a 225k gain in nonfarm payrolls in June following the 217k rise in May (consensus 212k). We expect the unemployment rate to fall to 6.2% from 6.3% in May.
For our Fed call the most interesting piece is the wage data. We expect average hourly earnings to increase by 0.3% in June (cons. 0.2%, previous 0.2%), which would reinforce the impression that the labour market is tighter than the Fed believes.
That would support our call that the Fed hikes already in the first quarter, i.e. faster than the market currently prices in.
ECB unlikely to offer reason to cheer
This time around after all the excitement the ECB offered in June, today’s meeting is far less eventful. No new signals or easing measures are in store, nor are likely to be under consideration for several months.
ECB will be very reluctant to do more, before it can better estimate the effect of the measures announced in June. That would be at earliest late this year.
After yesterday’s rise, the risk of higher rates due to the ECB has diminished somewhat.
France and Spain at the auction front
France will offer bonds maturing in 2024, 2027 and 2030 for a combined EUR 7.6 to 8.5bn today. Spain instead will auction a new 5-year benchmark as well as re-open a bond maturing in 2044.
Nordea