German bond yields fell back yesterday and the curve bull-flattened. The 10-year yield retreated by 2bp, roughly offsetting the move from the day before. The US 10-year yield, in turn, rose modestly (less than a bp). Intra-Euro-zone bond spreads continued to narrow, though the moves were not huge.
Core yields are likely to creep higher today on the back of positive data surprises, but in the bigger picture, the German 10-year yield is still heading towards new record lows.
Equities squeezed small gains on both sides of the Atlantic. The S&P 500 managed a rise of 0.18%, which was enough to lift the index to a new high. Asian markets are trading mixed this morning despite positive Chinese PMI data (see more below), and Europe is set to open slightly down.
China’s economy picks up steam
The HSBC/Markit July flash manufacturing PMI for China delivered a positive surprise, climbing from 50.7 to 52.0, the fourth consecutive rise and leaving the index at its best level since the start of 2013. The details were broadly positive as well, with e.g. new orders and new export orders improving clearly. The numbers illustrate that the stimulus measures introduced in China are lifting growth for now, but beyond the short term, Chinese growth is still set to slow down, as the rebalancing of the economy continues.
Bank of England not unanimous for too much longer?
BoE minutes showed a unanimous monetary policy decision at the July meeting, but the differing views about the outlook are starting to emerge. Some though that the risk of a small rise in Bank Rate derailing the expansion and leaving inflation below the target in the medium term was receding as that expansion became more established, while others thought a premature tightening in monetary policy might leave the economy vulnerable to shocks, with the effectiveness of any further stimulus uncertain.
Employment growth continued to be more robust than the Bank had expected, but the surprisingly modest wage pressures mean that the Bank is not in any hurry to start to raise rates, and the first rate hike is not around the corner yet.
Views about the amount of slack in the economy likely differ as well, and the August monetary policy meeting and especially the inflation report will be very interesting.
Russian sanctions on the agenda again
The EU will discuss the prospect of imposing more sanctions on Russia again today, as the European Commission is set to present its proposals to representatives of national governments. According to the Financial Times, the proposals would include banning all Europeans from purchasing any new debt or stock issued by Russia’s largest banks, barring the banks from listing new issues on European exchanges and preventing them from using EU markets to raise funds. Such measures would go much further than anything the EU has done so far, and it looks very unlikely that an agreement the proposed measures can be reached at this point. While the threat of more sanctions is very real, the EU is likely to continue to proceed rather gradually on the matter.
Euro-zone PMIs set to rebound
The highlight in today’s calendar will be the Euro-zone July flash PMI numbers at 10:00 CET. The composite output PMI has fallen for two months already, and the third drop in a row would raise new worries about the sustainability of the recovery. A rebound looks likely, driven by a better manufacturing PMI. As the focus is very much on the subdued inflation in the Euro zone at the moment, the market reaction should be stronger in case the numbers disappoint, as a loss of momentum for the economy would point to even lower inflation pressures. The French numbers will be released already at 9:00 CET and the German data at 9:30 CET.
In other data today, UK June retail sales will be released at 10:30 CET, US weekly jobless claims at 14:30 CET, the preliminary Markit manufacturing PMI for the US at 15:45 CET and US June new home sales at 16:00 CET.
On the issuance front, the US will sell USD 15bn of 10-year TIPS.
Nordea