Bonds initially took a beating on solid US payrolls growth on Friday, but later recovered, as wage gains continued to be muted. The German 10-year yield still ended the day up by 2bp and the US 10-year one by around 1bp. Shorter US yields rose more, though (the 5-year Treasury yield up by 4bp). The Eonia overnight rate, in turn, made new lows at 4.5bp and is now set to remain in negative territory. The EUR/USD continued to fall and already touched 1.25.
Intra-Euro-area spreads narrowed mostly, but some more profit taking and thus wider spreads are likely ahead in the near-future.
Core yields are set to continue to creep higher today in the aftermath of the ECB’s message last week and strong US payrolls gains.
Equities rallied on both sides of the Atlantic on Friday (S&P 500 up by 1.12%, still ending the week down by 0.75%). Asian equities are trading mostly higher this morning, and Europe is set to open up as well.
US payrolls strong – still no wage growth
US payrolls numbers surprised positively on Friday. Payrolls grew by 248k, while the prior two months were revised higher by a total of 69k. The unemployment rate dropped from 6.1% to 5.9%, as the household survey showed 232k job gains, while the labour force contracted by 97k. Despite strong job gains, average hourly earnings disappointed again with a flat m/m reading, though the August gains were revised up to 0.3% m/m. At least the average work week lengthened to 34.6 hours, the highest since 2008.
Overall, another sign that the US labour market is doing rather well, and wage pressures should pick up soon. However, as they have not so far, the Fed is still not in a hurry to tighten policy.
Later on Friday, the non-manufacturing ISM index retreated from 59.6 to 58.5, but the employment component hit a 9-year high of 58.5, also pointing to a solid labour market.
French disobedience not going unnoticed
The European Commission is preparing to reject the French 2015 budget proposal, according The Wall Street Journal, citing European officials. The new French budget targets a deficit of 4.3% of GDP, far from the earlier 3% goal and putting the budget in serious non-compliance with EU rules. Pressure to change the budget would put more pressure on the already weak French government, but not taking action would imply also the new EU deficit rules would not be much more than a joke. French Finance Minister Sapin, meanwhile, said in an interview with the Financial Times that Europe must focus more on growth rather than deficits.
Focus remains on central banks – Q3 corporate earnings season starting
This week’s economic data calendar looks light, but some action will be in store in the central bank front. Fed minutes will be released on Wednesday, the Bank of England will release its monetary policy decision on Thursday, while the ECB’s Draghi will speak later that day.
Q3 corporate earnings season will also be set in motion this week, but the pace will really pick up only next week. Only 9 S&P 500 companies will report during the week.
In today’s calendar, German August factory orders will be out at 8:00 CET. In addition, the ECB’s Costa will speak at 10:00 CET and Chancellor Merkel at 15:00 CET.
German, Austrian and US supply
This week’s Euro-area supply calendar looks calmer compared to last week, but US auctions will add to the general supply action. Austria will re-open its 10-year benchmark for EUR 1.1bn tomorrow, while Germany will tap its 5-year bond for EUR 4bn on Wednesday. In the US, USD 27bn of 3-year notes will be sold tomorrow, USD 21bn of 10-year notes on Wednesday and USD 13bn of 30-year bonds on Thursday.
Coupon and redemption payments from EUR government bonds will total around EUR 18bn this week. These will stem from German bonds.
Nordea