Government bond yields rose on Wednesday as the Fed minutes failed to turn the yields that crept higher. US 10-year yield rose to 2.54%. German counterparts rose slightly to 1.38%. Euro area periphery bonds saw demand.
Today the better than expected Chinese data has pushed up the Asian equity markets. Better risk sentiment should also raise German yields in the morning. Approaching European elections are likely to put a lid, however, on the rates prior to weekend. The expected success of euro-sceptic parties will increase again the political risks.
In the short end of the curve the approaching month-end has again lifted the bank overnight lending rate, eonia to 27bp. ECB June meeting will probably bring new measures to calm the money markets as well.
Finally better news from China
Preliminary HSBC/Markit purchasing managers’ index rose to a five-month high in May. The level at 49.7 was well above expectations at 48.3 and the previous level of 48.1. Both output and new orders rebounded.
Even though mini-stimulus likely lifted the Chinese sentiment, the level is still below 50. Many firms still suffer from overcapacity and debt overload, clouding the overall outlook for the sector. In addition, the cyclical support from restocking process is now pretty much gone.
Unless domestic or external orders pour in in the coming few months, manufacturing activities will remain subdued.
Prudent Fed discussing exit
Fed minutes delivered no big surprises. As expected, minutes showed that the central bank is considering range of options for normalizing monetary policy. The exit policy is however, according to minutes, part of prudent planning and did not imply that normalization would necessarily begin sometime soon.
Some participants claimed it is too early to confirm economy is moving to sustained above-trend growth, whereas some participants reported that labor market were tight in their districts.
Several approaches to raising short term rates are discussed. In addition, the question of when to stop reinvesting the asset purchases is considered. Read more on our views on Fed exit strategy here:https://nexus.nordea.com/#/article/8644
The story of the uninteresting EZ PMI’s
For the Euro-area PMI composite, we expect no change compared to April (54.0) reflecting an ongoing recovery at a moderate pace. In the manufacturing sector, the decline in the new orders component over recent months leads us to expect a small decline in the total manufacturing PMI. In contrast, we still see upside potential in the service sector. Price components are likely to support the picture of very subdued inflation pressures.
No matter the PMI’s, we are rather convinced that the ECB will act in June. As the market focus is already on the ECB June meeting, the rates are likely to stay on low levels for now.
Spanish bonds and rating action ahead
On Friday morning S&P is set to release its opinion on Dutch and Spanish ratings and Fitch on Greek ratings. S&P rates Spain currently at BBB- with stable outlook. With the rating below the other two major raters, the risk to the rating is now upwards.
Euro area PMI data will be published at 10:00h, France at 9:00h and Germany at 9:30h. Also, Spain will today sell 2.5-3.5bn euros of bonds maturing in 2019 and 2024.
Nordea