The bond market sentiment certainly continues to be strong amidst all the geopolitical uncertainty. The German 10-year yield hit a new record low yesterday at 1.11%, and finally ended the day down by around 3bp. A similar drop was seen in the US 10-year yield, while curves bull-flattened (short US yields actually rose a bit). Intra-Euro-zone spreads mostly narrowed further, though Portuguese and Greek bonds felt some pressure.
Core bonds are likely to remain supported this morning, but yields are likely to head somewhat higher during the day (see more below).
European equities ended the day with gains, but US equities felt pressure later on the back of more sanctions on Russia (see more below). S&P 500 ended the day lower by 0.45%. Asian equities are trading mixed to slightly higher this morning, while Europe is set to open a touch lower.
Further sizable sanctions imposed on Russia
The EU and the US announced the so-called phase-three sanctions yesterday, targeting Russia’s financial, energy and defence sectors. More details will follow, while the sanctions are set to apply from the start of next month. The measures are likely to have a big effect on the Russian economy, even though the EU has sought to limit the effect on its own economy (e.g. France is allowed to go forward with its existing contracts of delivering war ships to Russia). EUobserver writes, citing EU sources that the economic effects of the sanctions on the Russian economy had been estimated at 1.5% GDP in 2014 and 4.8% of GDP in 2015.
Retaliatory measures from Russia look likely, and the escalation of the crisis will increase fears that the feeble Euro-zone recovery will be derailed as well, which would also increase expectations the ECB will have to embark on further stimulus measures down the road.
US housing market still struggling – consumer confidence surges
The US 20-city S&P / Case-Shiller house price index had a negative message to convey. It showed prices surprisingly fell by 0.3% in May (in seasonally adjusted terms), following a downward-revised 0.1% advance in April. This was the first monthly drop since early 2012. As the index depicts 3-month moving averages, the latest data suggest a significant loss of momentum in house prices in the past few months (still in March, prices rose by 1.3% m/m). The fall in prices was rather broad-based, since prices retreated in 14 of the 20 areas covered. The US housing market thus clearly continues to struggle.
A more positive message was sent by the Conference Board consumer confidence, which surged from 86.4 to 90.9, the best level since late 2007. The US consumers are thus gradually becoming more optimistic again, though it is worth remembering that the relationship between private consumption and confidence has been rather weak lately.
German inflation numbers and the Fed’s message to push yields higher
Today’s calendar is packed with interesting data and events, and certainly has the potential to provoke action in the markets. Preliminary July inflation numbers will start flowing in from the German states at 9:00 CET, while the first national numbers will be out at 14:00 CET. Euro-zone inflation numbers have continued to exhibit negative momentum, and have surprised to the downside almost constantly lately. Market expectations should thus be rather low already, and we could easily see a small rebound higher in response to the data.
The Fed’s statement, in turn, should not be that different compared to the message given by the Fed’s Yellen earlier this month in her Congressional testimony. However, the statement is likely to be tweaked to assume a slightly more positive characterization of the labour market, which should be enough to put some upward pressure on yields. The Fed will release its statement at 20:00 CET, while no press conference will be in store this time.
US GDP and the ECB’s lending survey with something positive to say
Also US Q2 GDP data will gather a lot of interest after the negative Q1 at 14:30 CET. A rebound is expected, but considering the weakness seen in Q1, there is clear scope for these numbers to surprise positively.
The ECB’s Q2 bank lending survey should keep up hopes that also the actual credit numbers would gradually pick up. The survey will be released at 10:00 CET.
Elsewhere in the calendar, Spanish Q2 GDP data will be out at 9:00 CET, the Euro-zone July economic sentiment indicator will be released at 11:00 CET, the US ADP employment report at 15:15 CET, and the Belgian Q2 GDP at 15:00 CET. In addition, Spanish Prime Minister Rajoy will meet Catalan President Mas to discuss the independence referendum plans of Catalonia at 11:00 CET, while the ECB will release the results of its latest 3-month operation at 11:10 CET.
US and Italian auctions ahead
Today will also be the busiest day on the issuance front. Italy will re-open its 5-year benchmark for EUR 2.5 to 3bn, the 10-year one for EUR 2 to 2.5bn and its 5-year floater for EUR 1 to 1.5bn. US auctions, in turn, will continue with USD 15bn of 2-year floaters and USD 29bn of 7-year notes.
Nordea