Bonds rallied on both sides of the Atlantic on Friday, and curves bull-flattened. The German 10-year yield fell by some 3bp back to around 1.15%, while the US 10-year yield descended to 2.47%, both levels slightly higher than what was seen earlier last week. Intra-Euro-zone spreads mostly widened a bit for a change.
Yields are set to creep slightly higher today on expectations that the Fed might assume a slightly less dovish tone at its meeting this week.
Equities took losses on Friday on both sides of the Atlantic. S&P 500 lost 0.48%, while European equities suffered a bit more. Asian equities are mostly trading with gains this morning, which have been especially sizable in China. Also European equities are set to open higher this morning.
German Ifo disappoints – UK growth still strong
The German Ifo index could not replicate the positive message delivered by the PMIs the day before. The expectations index fell from 104.8 to 103.4, the third straight fall and leaving the index at its lowest level in a year. The geopolitical uncertainties seem to have hit the Ifo faster than the PMIs, and continue to cast a shadow over the Euro-zone economy.
Strong 0.8% q/q GDP growth continued in the UK, in turn. The economy finally surpassed its previous peaks from Q1 2008. However, before there are clearer signs of wage growth picking up, the Bank of England will not be in a hurry to start to raise rates.
The surge in LTRO repayments not repeated
The ECB announced on Friday that banks will repay EUR 3bn of 3-year LTRO this week, sharply down from the EUR 21.5bn seen last week. Last week’s surge in repayments was likely connected to the large amount of maturing Spanish and Italian bonds this week, and was thus overplaying the underlying pace of repayments.
Portugal receives good news from Moody’s
The rating agency Moody’s lifted the Portuguese rating from Ba2 to Ba1 with a stable outlook. The action reflects Moody’s expectations that fiscal consolidation remains on track despite unfavourable rulings by the Constitutional Court and the government’s comfortable liquidity position. The rating move itself is not particularly significant, but the timing is welcome for Portugal, as it confirms the latest worries around the Portuguese banking sector have not at least affected Moody’s assessment of the creditworthiness of Portugal.
What is with Germany and a tighter EU?
The German Constitutional Court will continue to have its hands full. This time five German academics have filed claims against the EU’s banking union, especially the Single Supervisory Mechanism but also the Single Resolution Mechanism. The Court is unlikely to block the banking union either, even though it may place some constraints on the details, but the continued claims illustrate that many Germans continue to have doubts about the merits of tighter integration. A good measure of how many Germans are becoming more sceptical of further integration is the support for the Alternative für Deutschland party. This support amounted to some 7% in the recent European Parliament elections.
A huge week ahead: the Fed, US GDP, Euro-zone inflation and payrolls
This week’s calendar looks very heavy, with the main focus in the three last trading days of the week. The Fed’s monetary policy decision and advance Q2 US GDP numbers will be released on Wednesday, the flash estimate of Euro-zone July inflation on Thursday, and the US manufacturing ISM and July payrolls on Friday.
The Fed’s assessment should be largely unchanged, but if anything, the statement could take a slightly less dovish tone, while no press conference will accompany the meeting this time. US GDP growth, in turn, should have rebounded clearly after the disappointing Q1, while another strong payrolls report should be in the cards.
Euro-zone inflation will likely print another subdued reading, but it is worth remembering that downside surprises have often been seen in the numbers lately. Preliminary July German inflation numbers will be released already on Wednesday. The ECB’s Q2 lending on Wednesday will be interesting as well.
In today’s calendar, the highlights include the US Markit non-manufacturing PMI at 15:45 CET and the June pending home sales index at 16:00 CET.
Italian & US auctions and plenty of coupons and redemptions
Bond auctions are not fully on summer break yet. Italy will sell 2-year zero-coupon bonds for EUR 1.75 to 2.25bn as well as inflation linkers maturing in 2018 and 2024 for EUR 0.5 to 1bn each today. BTPs and floaters will be sold on Wednesday.
In the US, USD 29bn of 2-year notes will be sold today, USD 35bn of 5-year notes tomorrow and USD 15bn of 2-year floaters as well as USD 29bn of 7-year notes on Wednesday.
Coupon and redemption payments from Italian and Spanish bonds will total a huge EUR 69bn this week, the second largest weekly amount of such payments from EUR government bonds remaining this year and offering further support to the bond market. After this week, the following four weeks will have much less coupon and redemption money in store.
Nordea