Core bonds continued to feel pressure on Friday, while curves bear-steepened. The German 10-year yield ended the day up by 4bp, while the US 10-year yield surged 6bp higher. Solid US retail sales raised expectations that the Fed could take a more hawkish stance at its meeting this week. The US 10-year yield is now at its highest in two months.
Core bonds should find some support today after the sizable increase in yields already seen, especially as there have been mounting signs that the cease-fire in Ukraine is not holding, but in general more pressure is likely to be in the cards heading into the Fed meeting.
Intra-Euro-area spreads finally ended the day narrower on Friday, but more pressure for wider spreads is set to be in the cards this week, as uncertainty is created by the Scottish referendum, the ECB’s first TLTRO and the expected more hawkish stance from the Fed (see more below).
European equities closed almost flat on Friday, while US equities took losses (S&P 500 down by 0.60%). Asian equities are trading lower this morning, and also Europe is set to open down.
China’s economic performance continuing to raise questions
China’s economic data batch for August, released over the weekend, disappointed again. The biggest upset was delivered by industrial production, which saw its growth retreat from 9.0% y/y to 6.9%, the lowest since late 2008. E,g. the manufacturing PMIs have been pointing to rebounding growth rates already, but the new data raise fresh questions about the weaknesses being felt in the Chinese economy. After last week’s data showed only limited price pressures, expectations of more stimulus measures are on the increase again.
Euro-sceptic voices rising in Germany
The German anti-euro party, Alternative für Deutschland or AfD, gained seats in two more regional parliaments, winning 10-12% of the votes. With a grand coalition government already in place, such shares do not yet shatter national politics, but the rise of the AfD increases the odds a grand coalition government will need to stay in place. With the ECB having to resort to measures seen as increasingly controversial in especially Germany, the AfD could easily gain more support going forward.
Fed changes guidance, first TLTRO and the Scots vote (no)
This week’s calendar certainly looks heavy, and it will be a wonder, if we won’t see plenty of market action this week. The highlights include the Fed’s meeting concluding on Wednesday, the first TLTRO allotment on Thursday and the Scottish independence referendum also on Thursday. The Fed is set to change its forward guidance and drop the reference to the first hike being a considerable time away. The first ECB TLTRO, in turn, is likely so see sufficiently low demand to disappoint, while the Scots are still most likely to vote no, but that does not mean markets would not be nervous ahead of the vote.
Elsewhere in the calendar, BoE minutes and US August inflation numbers will be released on Wednesday and US August building permits and housing starts as well as the Philly Fed index on Thursday.
The US data flow will start today with the New York Fed manufacturing index at 14:30 CET and August industrial production data at 15:15 CET.
German, Spanish and French supply aheadThis week’s bond auctions will centre on Wednesday and Thursday. Germany will re-open its 2-year benchmark for EUR 4bn on Wednesday, while Spain and France will sell bonds on Thursday. France will auction 2- and 5-year nominal bonds for EUR 7 to 8bn and three inflation-linkers for a combined EUR 1 to 1.5bn. Spain, in turn, will auction a new 3-year bond.
In the US, USD 13bn of TIPS will be sold on Thursday.
Coupon and redemption payments are set to provide a boost of around EUR 27bn this week. These flows will stem mainly from Finnish bonds and Italian linkers.
Nordea