The huge bond rally continued in the Euro zone on Friday. The German 10-year yield plummeted by another 5bp, while intra-Euro-zone spreads saw a massive narrowing. E.g. the Spanish 10-year benchmark bond yield plunged by some 18bp, while good performance was seen in also the semi-core names.
In the US, yields finally ended the day higher in the aftermath of the May employment report (see more below). The 10-year yield edged up by a modest half a bp, while shorter yields rose a bit more. Yields have edged further up in Asian trading overnight, but in the Euro-zone, one should wait for more signs of stabilization before betting on a rebound higher in yields.
The Eonia overnight rate slumped to 6.7bp, the lowest in more than a year.
Equity markets continued to show good performance. S&P 500 rose to another new record after a 0.46% advance, while in Europe many indices have risen to their highest level since late 2007 / early 2008. Also Asian equities have started the week positively, though the moves have not been particularly large, while Europe is set to open with more gains.
The rating agency Standard & Poor’s upgraded Ireland from BBB+ to A- with a positive outlook on Friday, not a big surprise, but in the current environment will further support Irish bonds.
Estimating the effect of ECB measures takes time – easy policy to continue for a very long time
The ECB’s Constâncio commented on Friday that the ECB’s new TLTRO refinancing operations could only be judged after the second tranche in December. He added that if some downward shock created a much deteriorated situation, then the ECB would have to contemplate the use of a broader programme of asset purchases.
Executive Board member Cœuré, in turn, said over the weekend that the ECB wanted to indicate clearly that monetary conditions between the Euro zone and the UK & US would diverge for a period of several years. He added that the ECB was going to keep rates close to zero for an extremely long period. His comments only reinforced the notion that the ECB has assumed a much stronger version of forward guidance.
Bundesbank Weidmann, on the other hand, said it was absurd to immediately herald the next round of easing measures, as it was now time to wait and see the effects of the recent easing measures. He added the decision on the easing package had not been an easy one.
Friday’s comments illustrate further that a broad-based asset purchase programme will not be even up for discussion until very late this year, at the earliest.
US payrolls rather uneventful
The US May employment report printed quite close to expectations this time. Payrolls grew by 217k (vs the Bloomberg consensus of 215k), while the April gain was revised slightly lower from 288k to 282k. The unemployment rate stayed put at 6.3%, average earnings rose by 0.2% m/m and the workweek was unchanged. Overall, the numbers support the notion that the US labour market recovery is resuming after some weakness late last year and early this year.
Weak Chinese import data continues to point to domestic weaknesses
China’s export growth rebounded from 0.9% y/y to 6.7% in May, but imports continued to disappoint with a 1.6% y/y contraction (vs a 0.8% increase the month before). The weak import data continues to point weak performance in the Chinese domestic economy, and will keep the discussions centred on, what kind of further stimulus measures will be introduced.
US retail sales the highlight of a quiet week
As is often the case, the second week of the month looks rather calm this time as well. The highlight will be the US May retail sales report on Thursday that should have a more positive message to convey after the disappointing April numbers. China’s May data batch (e.g. industrial production, investment, retail sales, money supply) will enliven the calendar a bit, though. In the Euro zone, April industrial production will be out on Thursday.
In today’s calendar, the Fed’s Bullard will speak at 15:10 CET, Tarullo at 18:45 CET and Rosengren at 19:30 CET.
US, Dutch, German and Italian supply
This week’s auction calendar has a bit more to offer compared to the economic data front. The Netherlands will re-open its 2017 bond for EUR 2.5 to 3.5bn tomorrow, while Germany will tap its 2023 linker for EUR 1bn on the same day and its 2-year benchmark for EUR 4bn on Wednesday. Italy, in turn, will sell BTPs and floaters on Thursday.
In the US, it will the week of the longer benchmark auctions. USD 28bn of 3-year notes will be offered 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 some EUR 17bn this week. These will stem mainly from a maturing German bond.
Nordea