German 10-year Bund yield was again pressured below 1% with the hopes of more ECB easing keeping the rates down. Spanish and Italian 10-year yields made new all-time lows during the day. In the US the 10-year Treasury yield inched 2bp higher to 2.43% as the Fed minutes were less dovish.
Today the soft PMI numbers balance the more hawkish Fed minutes and keep the Bund yield from rising.
Yikes, hikes!
Minutes of the Fed July meeting provided new evidence of an intensifying debate inside the Fed about when to respond to the progress in labour market and inflation. Overall the minutes reflect a slightly less dovish stance which will increase the focus on Yellen’s speech in Jackson Hole on Friday.
Although the FOMC approved on a 9-1 vote keeping its dovish forward guidance for interest rates, the minutes indicated rising support for a change.
Many participants noted that if convergence toward the FOMC’s objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated.
We continue to expect the Fed to turn more hawkish later this year and today’s FOMC minutes obviously support our view that markets will start pricing in more rate increases from the Fed as the economy continues to strengthen and the geopolitical concerns start to fade.
China falters
This morning the HSBC Flash China manufacturing PMI came out lower than expected. After 51.7 in July, flash PMI dropped to a 3-month low 50.3 in August. Both output and new orders moderated.
Figures illustrate the economic recovery losing some speed in August and will provide a soft note to the risk sentiment today.
Two hawks in the house
Bank of England minutes surprised on the hawkish side as already two MPC members voted for a rate hike in the August meeting.
The two hawks saw economic circumstances to be sufficient to justify a rate hike of 25bp. These members noted that the continuing rapid fall in unemployment alongside survey evidence of tightening in the labour market created a prospect that wage growth would pick up.
It is worth noting though that for most members there is insufficient evidence of inflationary pressure to justify an increase in the rates. Most likely the first rate hike won’t materialize before next year no matter the dissenters.
European PMIs pressured by geopolitics
We expect a small decline for the Euro area flash PMIs today. Manufacturing PMI should come down a bit reflecting the current geopolitical uncertainty.
The composite PMI surprised with a fairly strong increase last time that was driven by services. As there is no convincing reason for the service component to rise to a 3-year high, and it should come down now.
PMIs are pointing towards slow growth but have recently not been particularly reliable indicators for GDP.
Nordea