Bond yields edged slightly lower yesterday on equity weakness and poor Euro-zone economic data, but trading volumes remained low. The German 10-year yield retreated by around 1bp, while the corresponding US yield fell by some 3bp. Intra-Euro-zone spreads saw mixed performance.
Equities were under pressure. The main European indices lost around 1%, while S&P 500 dropped by 0.39%. Asian markets are mostly trading with small losses this morning, while Europe is set to open close to flat.
More profit taking could easily be seen in the equity markets today ahead of the Q2 earnings season, which should keep bonds supported.
German industrial engine stuttering
German May industrial production numbers delivered a big blow to hopes that the German industrial engine would provide a big boost to the German economy this year. The numbers are volatile from month to month, but the 1.8% m/m contraction seen in May was the third decline in a row and the worst showing in more than two years. The numbers may also have been distorted by the timing of the May 1 holiday. The manufacturing PMI has been pointing to weakening momentum for several months already, but the recent production numbers have been far worse than implied by the PMI. The 3m/3m annualized rate of production plunged to -4.3%. Unless production rebounded clearly in June, the performance of also the German economy is starting to look far from solid.
More aid for Greece – challenges far from resolved
The Eurogroup welcomed the Greek achievement of its May milestones, and confirmed the disbursement of another EUR 1bn of aid. Greek officials have ruled out the need for further aid, and instead aim to meet their remaining funding needs via the financial markets. Bloomberg reports, citing an EU official that Greece will probably need further emergency aid anyway, as it is slipping further behind in its commitments to reform the economy. Also the ECB’s Draghi had reportedly warned the Greek finance minister that the country should not let the reform process stall. Greece has promised to meet the next set of reform milestones by early August, while addressing the issue of providing more debt relief for the country looms. The Greek reform process has shown signs of dithering. As the country has reached a primary surplus, while the bulk of its aid payments have already been paid, the commitment of the country to the reform process will really be tested. The Greek risks have not gone away, but the country should still be able to find demand for the planned 3-year bonds later this week.
US labour market data and first Q2 earnings
No heavyweight data releases are in store today, but there are some numbers worth following. It will be interesting to see, whether the clear rise seen in the NFIB small business optimism index over the past few months continues (at 13:30 CET), while the US Job Openings and Labor Market Turnover Survey (JOLTS) will provide more information on how the labour market is doing at 16:00 CET (a report followed closely by the Fed’s Yellen). Germany will release May import and export data at 8:00 CET and the UK May industrial production at 10:30 CET.
In addition, the ECB’s Noyer will speak at 8:30 CET, Linde at 9:00 CET, EU finance ministers will meet at 9:00 CET, the ECB will release the results of its main refinancing operation at 11:10 CET, the Fed’s Lacker will speak at 19:00 CET and Kocherlakota at 19:45 CET.
Q2 corporate earnings season, in turn, will start with Alcoa today in the evening.
Auction calendar crowded
There will be plenty of action in terms of bond auctions today. The Netherlands will re-open its 10-year benchmark for EUR 1.5 to 2.5bn, Austria will auction bonds maturing in 2024 & 2044 for a combined EUR 1.1bn, while Germany will tap its 2018 linker for EUR 1bn. In the US, USD 27bn of 3-year notes will be sold.
Nordea