After some falls earlier in the day and volatility around Dr Yellen’s testimony, 10-year yields ended the day close to unchanged on both sides of the Atlantic. Shorter US yields rose a bit though. UK bonds underperformed after inflation numbers surprised to the upside (see more below), with the 10-year yield jumping by around 4bp.
In general, the bond market sentiment remains rather strong. Bonds are likely to remain supported today and yields could fall a bit.
Intra-Euro-zone bond spreads mostly narrowed. Portuguese bonds continued to underperform, but the moves were rather limited (the 10-year spread vs Germany widened by around a bp).
Equity markets felt some pressure again, with many European indices down by around 0.5% and S&P 500 by 0.19%. Chinese GDP data (see more below) have failed to move the Asian markets much, and the moves have been limited. European equities are set to open close to flat.
China’s remarkably stable growth accelerates a bit for a change
China’s Q2 GDP numbers came in at 7.5% y/y, slightly higher than expected and up from 7.4% in Q1. In general, Chinese growth has been remarkably stable: y/y growth has been in a range of 7.4% – 7.9% for 10 consecutive quarters, illustrating the willingness of the authorities to control growth and not something you see in many countries. In q/q terms, growth picked up more clearly from 1.5% to 2.0%. The pick-up in growth illustrates that the stimulus provided has had an effect, and China remains determined not to let growth slow down too much.
China also released its June data batch, which was a bit mixed but did not contain any major surprises. Industrial production and fixed asset investment came in slightly higher than expected, while retail sales growth was a tad weaker. Overall, the data was very close to expectations.
Fed surprised of the recent labour market performance
In her testimony at the US Senate, Fed Chair Yellen confirmed that the Fed is in no hurry to start raising rates. However, she did note that if the labor market continues to improve more quickly than anticipated by the Committee, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned. The comment thus implies that the recent performance of the labour market has been faster than the Fed was expecting, and if such development continues, rate rises are not too far away.
On a more dovish side, she noted the Fed had been fooled in the past by false dawns of an economic recovery, and the Fed needed to make sure the economy was on a solid trajectory before raising rates. Overall, we need to see more positive labour market data, and more specifically wage growth picking up, before the Fed is ready to turn more hawkish.
US consumers doing well again
US June retail sales data sent a positive signal of the underlying momentum in household spending growth. Core sales (sales excluding gasoline, autos, building materials and food services) jumped by 0.6% m/m in June following an upward-revised 0.2% gain in May. This was enough to lift the 3m/3m annualized sales growth to an impressive 6.7%, the best number in three years. Consumption thus appears to have rebounded after some weakness early in the year.
Did you see this, Carney?
UK inflation surprisingly jumped from 1.5% to 1.9% y/y in June, much higher than the consensus estimate of 1.6%. Together with the strong momentum in the UK economy in general and after BoE Carney’s warning that rates could rise sooner rather than later, the numbers will only add fuel to the rate hike speculation fire. Considering the recent volatility in monthly UK inflation numbers and the likely still considerable spare capacity in the economy, one should not jump the gun as far as BoE tightening is concerned. Still, the UK monetary policy outlook is becoming more interesting by the day.
US housing market, PPI and EU summit in focus
Today’s calendar includes several US data releases worth keeping an eye on. June core PPI reached 2% for the first time in 1.5 years in May, but is expected to fall back again. A high number would be taken as a sign that price pressures are gradually building (June PPI out at 14:30 CET).
US June capital flow data will be released at 15:00 CET, industrial production for the same month at 15:15 CET, the NAHB housing market index at 16:00 CET and the Fed’s Beige Book at 20:00 CET. The Fed’s Yellen, in turn, will repeat her testimony to the House Financial Services Committee at 16:00 CET (the Q&A has the potential to offer something different from yesterday).
In addition, the ECB’s Nowotny will speak at 12:15 CET, while another EU summit will take place to decide on the high-level appointments, starting at 15:00 CET with pre-summit meetings. In the UK, May labour market data will be out at 10:30 CET.
On the issuance front, Germany will re-open its 10-year benchmark for EUR 4bn.
Nordea