Core bond yields rose on both sides of the Atlantic yesterday and curves bear-steepened, as especially Euro-zone data releases surprised positively (see more below). The German 10-year yield leapt by 3bp, while the corresponding move in the US yield was some 4bp. Intra-Euro-zone spread narrowing continued.
Despite yesterday’s rise in yields, the bigger picture has not changed, and yields are likely to head lower again today ahead of the weekend. Worries around the Ukrainian/Russian crisis should continue amidst further talk of sanctions as well as on the back of reports that Russia would have fired artillery across its border with Ukraine, implying Russia was directly involved in the fight against the Ukrainian government forces.
Especially European equities had a positive day yesterday, while the gains were smaller in the US. S&P 500 squeezed a 0.05% gain after hitting new highs earlier in the day. Asian equities are trading mixed this morning, while Europe is set to open lower.
Market impact from positive PMIs likely short-lived
The flash PMIs for July point to a continued recovery in the Euro-zone economy. Positive development in sentiment indicators is certainly welcome at a time, when the effect of e.g. the Ukrainian/Russian crisis is weighing on the economy. It is worth remembering that the numbers are unlikely to capture the recent escalation in geopolitical tensions, but the latest weakening of the euro and the ECB’s June easing package, on the other hand, are supportive of the Euro-zone economy.
The data supported a small rebound higher in German bond yields, while intra-Euro-zone spread narrowing continued. However, the main focus in the Euro zone remains on the subdued inflation readings and geopolitical concerns for now, and a clearer change in the inflation outlook would likely be needed for a more sizable move higher in yields.
US economic data mixed
Yesterday’s US data package was somewhat of a mixed bag. On the positive side, initial jobless claims sank to an 8-year low of 284k, but the numbers are often volatile this time of the year because of auto plant shutdowns due to re-tooling. The Markit manufacturing PMI, in turn, retreated from a high 57.3 to 56.3, while the new orders index remains at an even better level of 59.8 despite a fall yesterday. The most negative news came from new home sales, which slumped by 8.1% m/m in June after the initially reported huge 18.6% jump in May was revised down to a gain of 8.3%. Sales thus continue to struggle.
Busy Friday ahead: UK GDP, Ifo, Euro-zone credit data, Russian ratings
Today’s calendar has quite a lot to offer. The German Ifo expectations index at 10:00 CET should rebound after recent falls, while Euro-zone June credit data, released at the same time, will still point to a weak credit environment. UK Q2 GDP numbers at 10:30 CET, in turn, are set to point to further strong momentum in the British economy.
In the US, the main focus will be on the June durable goods report at 14:30 CET.
On the ratings front, Standard & Poor’s has a chance to review its rating on Belgium (AA, stable), but no changes look likely at this point. More interestingly, Moody’s and Fitch are set to review their ratings on Russia (Baa1, negative and BBB, negative), and downgrades look very possible, which would add pressure on the Russian economy.
Another sizable LTRO repayment to put some upward pressure on the short end
After the surprisingly strong EUR 21.5bn repayment this week, the ECB’s 3-year LTRO repayment data at 12:00 CET will receive added focus. Due to the huge EUR 44bn of redemptions of Spanish and Italian government bonds next week, another high number looks likely today, which would put some upward pressure on the short end of the curve.
Nordea