Bonds initially took a beating yesterday after strong gains in US payrolls (see more below), but the moves moderated later. The US curve did bear-flatten some, but the 10-year yield ended the day up by only around a bp, having hit its highest level since early-May right after the payrolls numbers.
The German 10-year yield ended yesterday close to unchanged, while shorter yields edged down a bit. Intra-Euro-zone spreads narrowed on the ECB’s message.
Yesterday’s market reaction further supports the notion that the demand for bonds remains alive and kicking. Even stronger US jobs growth is not enough to seriously hurt the bond market, as long as wage pressures are absent.
German yields are likely to trade within a narrow range today with a small downward bias, as the US Independence Day holiday will contribute to low trading volumes.
Equities understandably cheered on yesterday’s news. The main European indices gained by about 1%, while in the US S&P 500 hit another record after a 0.55% advance. Asian equities are trading mostly with small gains this morning, while Europe is set to open slightly higher.
Payrolls surge but wage growth still moderate
US payrolls surprised notably to the upside with a 288k reading, while the two prior months were revised higher by a total of 29k. The April gain was revised to 304k, the first reading above 300k since early 2012. The unemployment rate slumped to 6.1% from 6.3%, the lowest since the summer of 2008. However, the strong job gains were not enough to push wage growth up: average hourly earnings grew by the expected 0.2% m/m, while the annual growth rate actually edged lower from 2.1% to 2.0%. Until wage growth shows clearer signs of picking up, the Fed will not be in a hurry to assume a more hawkish rhetoric.
Draghi brightens unchanged policy assessment with other announcements
Details on the upcoming refinancing operations and changes to the meeting schedule gave some colour to an unchanged monetary policy assessment. Draghi maintained a dovish tone, but the threshold for further near-term easing is high. As the inflation outlook remains subdued, the PMIs have shown signs of struggling, and the ECB has not implemented all the easing it has announced, yields and rates will remain low, spreads will narrow further, while the euro is not set to feel much further pressure from the ECB’s side in the near future.
Riksbank surprises with a 50bp rate cut
While a rate cut was generally expected, the Riksbank surprised yesterday by taking rates lower by a full 50bp to 0.25%.The move illustrates that the central bank is willing to increasingly try to tackle the too-low inflation instead of worrying over high household debt.The repo rate is now back to the lows seen 2009-2010.
Fourth of July contributes to a light calendar
After yesterday’s heavy calendar, today looks much calmer, not least because of the US Independence Day holiday. German May factory orders will be released at 8:00 CET, while the ECB will announce the latest 3-year LTRO repayment data at 12:00 CET.
On the ratings front, Moody’s has a chance to review its ratings on Belgium and the Netherlands. Moody’s still rates the Netherlands Aaa with a stable outlook, while its assessment on Belgium is Aa3 with a stable outlook. No changes look likely today.
Nordea