German bond yields ended the day slightly down on Friday and the curve steepened some (10-year yield down by some half a bp), but US yields climbed on the back of booming risk appetite and finally some signs of wage pressures picking up (see more below). The US 10-year yield ended the day up by 3bp to around 2.34%.
Intra-Euro-area spreads narrowed in earnest, as the BoJ’s new easing prompted expectations that the ECB would soon follow in announcing new accommodative measures. E.g. the Italian 10-year spread to Germany contracted by some 12bp.
Core yields are likely to creep a bit higher today, while spreads have some more narrowing potential.
Equities rallied across the board. In Europe, the Stoxx 600 jumped by 1.84%, while in the US S&P 500 advanced to a new closing high after a 1.17% climb. Asian markets are trading mixed this morning, while Europe is set to open modestly higher.
US wage pressures finally building
The US employment cost index beat expectations for the second month in a row with a 0.7% q/q increase, following a similar jump in Q2. Total compensation in private industries rose at a 2.7% annual rate in Q3 following surprisingly strong 3.4% advance in Q2. The employment cost index is a more comprehensive measure of wages than average hourly earnings, and implies wage growth would finally be picking up.
In other US data released on Friday, personal spending data for September was disappointing, but the Chicago PMI jumped to a 1-year high of 66.2, while the University of Michigan consumer confidence recorded its best reading since 2007.
Spanish political landscape looking increasingly uncertain
If the Catalan independence question was not enough, the latest poll added to the headaches facing the government. A poll yesterday put the anti-establishment Podemos party, formed less than a year ago, as the most popular party with 28% support, while the governing PP was left in third place behind also the Socialists. Among other things, Podemos is calling for a public investment programme, capping the work week at 35 hours, lowering the retirement age to 60 and prohibiting profitable companies from firing workers, according to Bloomberg. Such a programme could quickly destroy all the progress Spain has made in terms of reforming the economy in the past few years.
If Podemos can establish its support at current levels or even increase it ahead of next year’s parliamentary elections, political uncertainty would rise notably, something that should have a clear negative effect also on Spanish government bonds. Already the surge of the party goes to show that big changes in the political landscape can take place also rather rapidly.
Rebound in Euro-area inflation overshadowed by the drop in core
Euro-area inflation ended up rebounding modestly according to the October flash estimate, from 0.3% y/y to 0.4%. However, core inflation (headline excluding energy, food, alcohol and tobacco) was softer than expected, falling from 0.8% y/y to 0.7%, equalling the lowest level in the Euro era. Inflation in non-energy industrial goods fell into negative territory, while services inflation rebounded a bit. The numbers indicated once more that the ECB’s worries about too low inflation continue to mount.
Another big week: US elections, ECB, payrolls…
This week’s calendar offers excitement for virtually every day. The action starts today with the US manufacturing ISM index at 16:00 CET. US mid-terms elections will take place tomorrow, though the results will not be known before Wednesday morning European time. The ECB should sound dovish again on Thursday, while another strong gain in US payrolls growth will increase guesses about the Fed’s tightening schedule on Friday. Finally, Chinese October trade data will be released on Saturday, while Catalonia is set to hold its informal consultation on independence on Sunday.
Today’s calendar also includes the final October Euro-area manufacturing PMI at 10:00 CET, the UK manufacturing PMI at 10:30 CET and the final October US Markit manufacturing PMI at 15:45 CET, while the ECB’s Costa will speak at 10:30 CET, Constâncio at 13:00 CET, the Fed’s Evans at 15:30 CET, the ECB’s Nowotny at 18:30 CET and the Fed’s Fisher at 18:40 CET.
Austrian, German, Spanish & French supply
Austria will start this week’s EUR government bond auctions tomorrow with re-openings on bonds maturing in 2019 and 2024 for a combined EUR 1.1bn. Germany will re-open its 5-year benchmark for EUR 4bn on Wednesday, while Spain and France will sell bonds on Thursday. France will sell 10-, 15 and 20-year bonds for a combined EUR 7.5 to 8.5bn, while Spain will sell bonds maturing in 2017, 2024 and 2023.
Nordea