Core bonds continued to rally on both sides of the Atlantic, and the curve bull-flattened further, as geopolitical tensions and risk aversion continued. The German 10-year yield retreated by 4bp to a new record-low of 1.06%, while the corresponding US yield plummeted by 6bp yesterday and has fallen further to below 2.40% overnight, the lowest in more than a year. The German 2-year yield briefly visited negative territory for the first time in more than a year.
Core bonds are set to remain supported today, and yields will continue to fall. The German 10-year yield continues to target 1%, and is likely to tumble below this level in the near term. Tensions in Ukraine appear only to be increasing, while the news that President Obama has authorized air strikes in Iraq to halt the advance of militants only adds to general worries. All these tensions ahead of the weekend should turn into more flight-to-safety demand of core bonds and risk aversion.
Bonds outside the semi-core took another beating yesterday. The Italian 10-year spread to Germany blew some 10bp wider, while the corresponding Spanish spread expanded by around 8bp. These moves are likely to continue today.
Equity markets continued to feel the heat on both sides of the Atlantic yesterday. European equities in general suffered slightly less than 1% (but Italy and Portugal down by more than 2%), while in the US S&P 500 retreated by a further 0.56%. Asian equities are trading mostly lower this morning (apart from China, which has been helped by booming exports, see more below), with especially Japanese equities doing badly (down by more than 2%). European markets are set to open clearly lower, and more losses in general are likely to be in store today.
Draghi’s sausage full of derivatives
As expected, the ECB did not offer new easing measures or monetary policy signals at its meeting yesterday. The central bank did not sound too concerned about the recent escalation of geopolitical risks. The ABS purchases are coming, but not any time soon. The ECB’s message left core bond yields free to continue falling in the near term, while the euro can weaken further.
As Draghi’s message was in general rather uneventful, one of the highlights was his characterization that the ABS purchase programme would not target sausages full of derivatives, suggesting the programme would focus on ABSs having real loans as underlying assets.
Chinese exports surge – imports doing much worse
The growth in Chinese exports jumped from 7.2% y/y to 14.5% in July, much higher than expected and the best growth rate in more than a year. The numbers suggest external demand is picking up, though the monthly numbers have been very volatile lately and should be taken with a pinch of salt.
Imports continue to do much worse, implying the Chinese domestic economy is still not doing that great. Import growth fell back into negative territory (showing 1.6% y/y contraction vs 5.5% growth in June), which was a disappointment.
More bad data from the German industry
Weak momentum continues in the German industrial production. After three straight months of declines, production rebounded by a modest 0.3% m/m in June. This was enough to push the y/y rate into negative territory for the first time in almost a year. Coming on the heels of disappointing industrial orders, recent data suggest the German economy contracted in Q2 after recording rather strong growth in Q1.
US unit labour cost data gauged for signs of inflation pressures
The first release of US Q2 unit labour costs and productivity numbers will take place today at 14:30 CET. The Fed is following labour cost data very carefully, and after the surprising jump in the employment cost index in Q2, the unit labour cost data should receive plenty of attention. A high number should have potential to put at least temporary pressure on bonds, though in the current environment, such pressure would likely prove to be short-lived.
In the Euro zone, German June trade numbers will be out at 8:00 CET and French June industrial production at 8:45 CET, while the ECB will release the latest 3-year LTRO repayment numbers at 12:00 CET.
Nordea