Especially US bonds took a beating yesterday after better-than-expected GDP numbers (see more below). The US 10-year yield surged by 10bp to above 2.55%, and the curve saw clear bear-steepening. Also German yields rose, with the 10-year yield closing the day higher by 5bp. Intra-Euro-zone spreads saw somewhat mixed performance.
Yields are likely to correct a bit lower today, as month-end buying and soft Euro-zone inflation data support the demand for bonds.
European equities felt pressure, while in the US S&P 500 closed roughly flat. Asian equities are trading mixed this morning, while Europe is set to open slightly higher.
Fed turns slightly less dovish
The Fed expectedly announced another USD 10bn tapering move yesterday, but the changes to the statement were more interesting. The statement said the unemployment rate had declined further, and dropped the previous reference to the rate being elevated. It did add that a range of labor market indicators suggests that there remains significant underutilization of labor resources. On inflation, the Fed noted that inflation had moved somewhat closer to the longer-run objective instead of the previous characterization of inflation running below the longer-run objectives. The statement added the Fed judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat.
This time there was one dissent, with the hawkish Charles Plosser objecting to the guidance indicating that it likely will be appropriate to maintain the current target range for the federal funds rate for “a considerable time after the asset purchase program ends,” because such language is time dependent and does not reflect the considerable economic progress that has been made toward the Committee’s goals.
The Fed thus turned slightly less dovish yesterday, and with labour market recovery continuing and inflation pressures gradually building, another twist towards a more hawkish stance should be ahead in the September meeting, when also updated projections and a press conference will be in store.
US GDP with a strong rebound
US GDP surged by 4.0% annualized q/q in the second quarter of the year after a revised (to a smaller drop) 2.1% contraction in Q1. GDP was boosted especially by private investment, while also personal consumption rebounded. Also inventories made a significant contribution, and real final sales grew by a more modest 2.3%, less than during the last two quarters of 2013.
The market reaction was sizable, but these numbers tend to be revised many times, and are not the best indicator of where the US economy is heading.
Euro-zone loan demand picking up – credit standards eased
The ECB’s Q2 bank lending survey had a positive message to convey. Credit standards on loans to enterprises were eased in net terms for the first time since Q2 2007, while credit standards were eased in all loan categories. Loan demand, in turn, was positive for all loan categories and recovered further. The banks’ access to funding improved for all main market instruments.
The survey results continue to paint a picture of gradually improving loan environment, one that should slowly start to support the Euro-zone recovery as well.
Argentina defaults again
After failing to reach an agreement with some of its creditors, Argentina defaulted again yesterday. The default should not any surprise at this point, and the wider implications should be limited. However, for Argentina the course of events is very unfortunate, and its economy is set to fall deeper into recession, while inflation will likely increase further.
Another fall in Euro-zone inflation ahead
The highlight in today’s calendar will be the flash estimate for Euro-zone July inflation at 11:00 CET. Yesterday’s Spanish and German numbers already strengthened the view of very modest price pressures, which will continue to cause worries for the ECB. Spanish numbers came in at -0.3% y/y, the weakest since 2009, while German inflation decelerated from 1.0% y/y to 0.8% (still higher than the 0.6% in May). Euro-zone inflation thus also likely fell further in July from the already subdued 0.5% y/y in June.
Still, the fall is likely largely due to weaker energy prices, and the numbers would likely need to surprise more clearly to the downside to give bonds another more notable boost.
In the US, the Q2 employment cost index will be released at 14:30 CET, along with weekly jobless claims, while the Chicago PMI will be out at 15:45 CET.
Nordea