Bond yields tried to rise yesterday on the back of a report showing wage pressures picking up in the US (see more below), but plunging equity markets soon brought bond yields back lower. The German 10-year yield ended the day lower by around 1.5bp, while the corresponding US yield was close to unchanged (but shorter US yields dropped).
Intra-Euro-zone spreads saw mixed performance, with Portuguese spreads jumping on the back of more banking sector worries around Banco Espirito Santo, which is in need of more capital after heavy losses.
Core bond yields are likely to head higher today on more news of wage pressures picking up in the US, but further equity weakness should limit the losses for bonds.
Equities took a beating yesterday. The main European indices plummeted by around 1.5%, while Portuguese markets suffered by almost 3%. US markets suffered heavy losses as well, with S&P 500 down by 2%, the biggest daily tumble since April. Asian markets are trading with more modest losses this morning (apart from China, which is trading up a bit after the official manufacturing PMI rose to a 27-month high), but Europe is still set to open down, and the pressure on equity markets is likely to continue today.
US wage pressures finally picking up?
The surprisingly brisk 0.7% q/q jump in the US employment cost index received a lot of attention yesterday, sending yields clearly higher, albeit only briefly. The jump followed a more modest 0.3% gain in Q1, and seems to have been associated by some one-offs. One should thus not read too much into this individual number, but pay more attention to the wage developments in today’s employment report (see more below).
Another surprise yesterday came from the plunge in the Chicago PMI from 62.6 to 52.6. This index is quite volatile and the drop may have been affected by what is going on in the auto sector at this time of the year. Today’s manufacturing ISM will give us a better picture of how the US manufacturing sector is doing.
Euro-zone inflation keeps falling – this time due to energy
The downward momentum in Euro-zone inflation continued in June. Inflation fell from 0.5% y/y to 0.4%, the lowest since late 2009. The ECB can take some consolation from the fact that the drop was largely due to falling energy prices, while core inflation (excluding energy, food, alcohol and tobacco) stayed put at 0.8% y/y. Inflation no doubt remains too low for the ECB’s comfort, but yesterday’s numbers will not affect the outcome of next week’s meeting: the ECB wants to assess the effects of the June easing package, before even contemplating further easing.
Payrolls report finally pointing to brisker wage growth?
The highlight in today’s calendar will be the US July employment report at 14:30 CET. Another 200k+ payrolls numbers looks likely, but more importantly, wage growth could finally show signs of picking up. Average hourly earnings grew for 0.2% m/m in both May and June, and this growth rate looks likely to have picked up in July. As brisker wage growth is one of the likely prerequisites for Fed tightening, the wage numbers should receive plenty of attention. Especially after the Fed’s slightly less dovish message earlier this week, brisker wage growth numbers should be enough to push bond yields higher.
The calendar has plenty of other data to offer as well. Final July Euro-zone manufacturing PMI will be released at 10:00 CET (national numbers will flow in between 9 and 10 CET), UK manufacturing PMI at 10:30 CET, the US June personal spending report at 14:30 CET, final July University of Michigan consumer confidence at 15:55 CET and the US manufacturing ISM at 16:00 CET.
In addition, the ECB will release the latest LTRO repayment data at 12:00 CET, while Moody’s has a chance to review its rating on Greece.
Nordea