Core bonds continued to rally hard on Wednesday, and the rally initially continued yesterday, before yields rebounded. The US 10-year yield touched 2.40% yesterday, before rebounding to around 2.47% currently.
There is no denying the fact that the bond market sentiment remains strong and bonds are likely to continue to do well ahead of the ECB meeting next week. However, that meeting could easily be a trigger for a bigger rebound higher in longer yields and a steeper curve, especially as the May US payrolls report will be released the following day.
Today, yields are likely to continue to creep higher, following hawkish comments from the Fed’s George, who said the Fed should start to raise rates shortly after ending its bond buying purchase and rates should rise faster than many now expect. However, the move higher will be limited by the end of the month and the looming weekend.
Italian and Spanish bonds have virtually taken back all the losses seen earlier this month. The Spanish 10-year benchmark hit a new record-low of some 2.80% yesterday, while the corresponding Italian yield remains slightly higher compared to its record lows reached earlier in the month.
The Eonia overnight rate has fallen again clearly, after fresh liquidity was injected into the system. Yesterday’s fixing stood at 24bp vs 47bp on Tuesday.
Equity markets continue to enjoy positive momentum. S&P 500 gained a further 0.54% yesterday to reach a yet another record high. Asian equities are trading with limited moves this morning, and European markets are set to open close to flat.
Little need to worry about the downward revision to US Q1 GDP
US Q1 GDP numbers were revised lower from the 0.1% annualized q/q gain to a 1.0% contraction. The downward-revision was largely due to changes in inventories, while the first quarter in general was hit by bad weather. Growth in Q2 should see a big rebound.
Improving momentum of the US economy was also supported by the latest initial jobless claims data. Claims fell from 327k to 300k, pushing the more reliable 4-week moving average to its lowest since 2007. The modest 0.4% rebound in the pending home sales index, however, suggests that the housing market is struggling to regain momentum.
Inflation continues to pick up in Japan – household spending plunges
April data confirmed that household spending in Japan plunged in April, following a consumption tax increase, but the drop was even bigger than expected. Spending fell by 13.3% m/m following a 10.8% m/m jump in March. This pushed the y/y rate to -4.6% from 7.2% in March.
Inflation excluding food and energy jumped from 0.7% y/y to 2.3%, but excluding the consumption tax hike the increase was more modest. The Bank of Japan has estimated that the effect of the sales tax rise would be 1.7 percentage points to annual inflation in April. In addition, as the weakening of the yen has stalled this year, the Bank of Japan will still face considerable challenges in reaching its inflation target.
Eyes on US personal spending and Italian & Spanish inflation numbers
The highlights in today’s calendar include the US April personal spending report at 14:30 CET, with the Fed’s favourite inflation measure, while Spanish preliminary inflation numbers for May will be out at 9:00 CET and Italian ones at 11:00 CET, which will help shape expectations ahead of the Euro-zone flash estimate on Tuesday.
Today’s data calendar also offers the Chicago PMI at 15:45 CET and final University of Michigan consumer confidence for May at 15:55 CET.
In addition, plenty of central bank speeches will be in store. The ECB’s Visco will speak at 10:30 CET, the Fed’s Pianalto at 14:30 CET, the ECB’s Costa at 15:30 CET, incoming Fed President Mester at 18:30 CET, the Fed’s Lacker at 20:00 CET and Williams & Plosser at 23:00 CET.
Finally, the ECB will announce the latest LTRO repayment data at 12:00 CET.
Nordea