Bond yields fell both in Europe and the US as economic indicators failed to rise to the occasion. Equity markets powered higher as expectations for rate hikes dropped both in the US and the UK. Russia’s aid mission getting close to Ukraine. Watch German GDP data today.
Bond yields fell both in Europe and the US as economic indicators failed to rise to the occasion. In Europe, the German ZEW came out lower than expected and in the US it was retail sales that disappointed growing only 0.1% ex autos; it was expected to grow 0.4%. The yield on the 10-yr T-note dropped 3 bps to 2.42% and the Bund yield fell 3 bps to 1.03%.
Equity markets powered higher with the S&P 500 ending the day 0.7% higher and just 2.1% shy of the record high reached July 24th. Expectations for a Fed rate hike by mid-2015 dropped to 36%. In Asia this morning, Chinese equities are weaker as the fallout from yesterday’s weak credit growth numbers still reverberates but other Asian markets are higher.
We expect bond markets to trade on the ebbs and flows of geopolitical news but watch German GDP data at 8:00. Following the weak ZEW and the pullback in yields on US retail sales, market is pricing for a weak number.
ZEW expectations fell more than expected, GDP forecasts go down
The decline in ZEW expectations was larger than expected. The steep fall to 8.6 in August (from 27.1) reflects financial analysts’ uncertainty about how events in geopolitical trouble spots will play out. Expectations are now below the long-term average (25). It was the 8th decline in a row, and the biggest since June 2012. Such a fall in ZEW expectations can easily be followed by a decline in Ifo expectations by around two to three points (data out on 25 August).
Bank of England rate hike seems further away
The Bank of England (BoE) took a dovish turn yesterday with Governor Carney saying that rate increases would be gradual and limited. The inflation report also highlighted that the slack in the economy has shrunk to about 1%. The BoE is zooming in on wage development as a key indicator for when the time is right to lift rates and as it was announced that wages dropped 0.2% in Q2 even though unemployment fell, expectations of a 2014 rate hike was almost crushed with the probability of a 25 bps rate hike by end-year dropping from 40% to 20%.
In Ukraine, the waiting continues
The disputed Russian aid convoy heading for Ukraine is getting closer to the border. Meanwhile, it is still unclear if the Red Cross (ICRC) will be running the show on the ground overseeing the distribution of aid. At the same, Ukrainian forces are reportedly close to have Donetsk and Luhansk encircled and cut off from the outside.
Highlights today
Today’s data include German Q2 GDP at 8:00 with consensus expecting a drop of 0.1% on the quarter and French GDP growing 0.1%. Also the ECB will publish its monthly report. Demand for 10-yr T-notes was high at yesterday’s auction. Bid-to-cover was 2.83 compared to the average of 2.69 for the last 10 auctions. Today, the Treasury will sell USD 16bn in 30-yr T-bonds.
Nordea