Core bond yields continued to head higher yesterday, modestly in the Euro area, more so in the US. The German 10-year yield ended the day up by 1.5bp, while the US 10-year yield jumped by another 6bp to just below 2.30%. Intra-Euro-area bond spreads edged wider in the semi-core, but the bonds with higher spreads continued to perform better.
Oil prices fell again, but the Brent front contract stayed above USD 70, suggesting prices are establishing support around these levels.
Core yields are likely to continue to creep higher today, with US Treasuries having more upside compared to German yields.
Equity prices rebounded. The Stoxx 600 gained 0.50%, while S&P 500 climbed by 0.64%. Asian markets are trading mostly slightly higher this morning, while Europe is set to open with some gains as well.
Fed close to changing its guidance
Fed’s Vice Chairman of the Board Fischer confirmed yesterday that the Fed was getting closer to replacing its pledge to hold rates low for a considerable time, but he promised the phrase would be replaced with another form of guidance. He said the Fed does not want to surprise markets, but refused to give precise estimates about when rates would start to rise, linking the first hike once again to developments in economic data. The Fed primarily sees the lower oil prices as positive for the economy, and remains on course to start raising rates around the middle of next year.
Here we go again – government shutdown risks in the US
US Congress is in the middle of a government funding fight again, as the current spending bill will expire on 11 December. This time, however, it seems unlikely the government is allowed to go into shutdown. The Republicans are reportedly working on a bill that would fund most of the government through September 2015, but funding for the Department of Homeland Security would be extended only to early next year. The Republicans very much oppose President Obama’s plans for immigration reform via an executive order, and the immigration battle could then be continued by the new Congress, which will convene early next year. This time, the looming funding deadline is unlikely to cause too many market worries.
Pace of economic data releases picking up
Even though it is the final two working days of the week that are the most interesting ones, already today’s calendar has much more to offer compared to yesterday. The highlight will be the ADP employment survey at 14:15 CET, offering guidance for the official US employment report on Friday. The non-manufacturing ISM index will be out at 16:00 CET and the Fed’s Beige Book at 20:00 CET.
In Europe, the final November services PMI will be out at 10:00 CET, UK services PMI at 10:30 CET and Euro-area October retail sales at 11:00 CET.
In addition, UK Chancellor Osborne will make his Autumn Statement to the House of Commons at 13:30 CET, while the Fed’s Plosser will speak at 18:30 CET and Brainard at 20:00 CET.
German 5-year auction and Italian buybacks
Germany will re-open its 5-year benchmark for EUR 3bn today. Italy, in turn, offers to use its cash surpluses to buy back three fixed-coupon bonds maturing in 2015, 2016 and 2017 as well as two floaters maturing in 2015 and 2016.
Nordea