US Treasuries took a beating and the curve bear-flattened, as US payrolls numbers were strong. The 10-year yield jumped by 7bp, while 5-year yields surged by 11bp. German bonds were quite resilient to the US moves, something the ECB can be happy about, and the 10-year yield ended the day up by only some 1bp.
Intra-Euro-area spreads rallied again in earnest, with both Spanish and Italian 10-year spreads vs Germany ending the day narrower by close to 7bp.
Core yields should have some more room to rise today, but the upside for German bonds looks much more limited compared to the US.
Oil prices have continued their renewed slide.
EUR/USD has continued to drop to its lowest since 2012 on the back of dollar strength.
The ECB disappointment that hurt European equity markets on Thursday was nowhere to be seen any more on Friday: the Stoxx 600 surged by 1.78% to its highest since early 2008 (Italian, Spanish and Greek markets performed even better). In the US, S&P 500 did hit new records, but its daily gain was a more moderate 0.17%. Asian markets are trading mostly higher as well this morning, especially in China, even though November trade data, released this morning, came in clearly below expectations (export growth down from 11.6% y/y in October to 4.7%, while imports contracted by 6.7% y/y).
Payrolls – and finally also earnings – surge
US payrolls grew by an impressive 321k in November, the best reading since January 2012. The prior two months were revised up by a total of 44k. More importantly, average hourly earnings jumped by 0.4% m/m, the biggest rise in 1.5 years, though this still only raised the y/y rate from 2.0% to 2.1%. The unemployment rate stayed unchanged at 5.8% (actually rose from 5.756% to 5.825%), as the household survey could not replicate the massive growth in payrolls.
One should never give too much weight for one set of payrolls numbers, but suffice to say the recent data confirm the picture given by many other indicators that the labour market is performing rather well at the moment. Lately, the signs of increasing wage pressures have started to mount as well, which if continued will bring the first Fed tightening move closer.
Italy suffers a downgrade – Ireland continuing to do much better
The rating agency Standard & Poor’s cut its rating on Italy from BBB to BBB-, the lowest investment grade rating. The agency cited the large increase in debt combined with consistently low growth and eroded competitiveness. However, as the outlook for the new rating is now stable, a downgrade into junk is not an immediate threat. S&P has now the most negative assessment on Italy of the three large agencies, and the move was the latest reminder that Mr Renzi’s reform efforts have not led to much so far. However, with ECB government bond purchases looming, Italian bond markets are set to remain supported.
The same agency raised its assessment on Ireland from A- to A on the back of solid growth prospects. The outlook for the new rating is stable. Of the three large ratings agencies, S&P now has the most positive view of Ireland. The bond markets, in turn, have been pricing in the brightening Irish prospects for quite some time already.
ECB TLTRO and US retail sales ahead
The most interesting day of the week will be Thursday. The ECB will release the allotment in the second TLTRO on that day, US November retail sales will be released, and the Russian central bank will release its latest monetary policy decision. Also the second TLTRO allotment is likely to be a disappointment, increasing expectations of large-scale bond purchases by the ECB. In the US, also politics will receive some attention, as the federal government funding bill is set to expire on Thursday.
China will also release a lot of data during the week, including November inflation on Wednesday and industrial production, investment and retail sales data for the same month on Friday.
In today’s calendar, German October industrial production will be released at 8:00 CET, the Euro-area finance ministers will meet to discuss national budgets at 15:00 CET, while the Fed’s Lockhart will speak at 18:30 CET.
Supply action not done for the year yet
Even though we are well into December already, this week’s calendar actually includes quite a lot of supply. Austria will sell its 10-year benchmark for EUR 0.88bn tomorrow, while Germany will tap its 2-year benchmark for EUR 4bn on Wednesday.
In the US, USD 25bn 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 amount to EUR 14bn this week, stemming from a maturing German bond.
Nordea