German Bund yields ended the day practically unchanged as the Euro area inflation came down to a new cyclical low just as expected. Even though the inflation is low, it is unlikely to lead to new measures from the ECB already this week.
10-year Bund yield at 0.89% is still close to all-time lows. In the US the 10-year Treasury yield was 2bp higher at 2.35%.
The US is on holiday today for Labour day which should keep volumes low. This week brings major drivers for the markets, as the ECB meets on Thursday and the US labour market figures are out on Friday.
In August the 10-year Treasury and Bund yields have come down by some 20-30bp as the situation in Ukraine has escalated and the markets have priced in further easing from the ECB. After the considerable moves the yields could end up higher with the strong labour market data and the ECB not delivering anything new.
Eonia fixing was up at 10bp on Friday. However, negative eonia fixings should come back as the month-end is now behind us.
Putin calls for statehood talks
Russian president Putin calls for statehood talks for southeast Ukraine. European leaders in the meantime claim to pursue with new round of sanctions unless Russia scaled back its intervention.
European Commission President Barroso said the situation was approaching a point of no return.
The tensions are likely to remain escalated for now and the worries about new round of sanctions will keep the markets cautious.
Soft data from China
Chinese official PMI came down in August to 51.1 from 51.7. The HSBC/Market PMI in turn was revised to 50.2 from 50.3.
Soft data from China will likely strenghten hopes in the market that the government will have to support economy to reach the growth objectives.
Euro area inflation not as bad as feared
Euro-area inflation fell to 0.3% y/y in August as expected. Low rate is the result of dropping energy prices. Slightly surprising was the core rate rising to 0.9% y/y (from 0.8% in July).
The upwards move in core prices keeps additional pressures off the ECB for now.
In the short term, energy prices will determine whether inflation will move even lower in September. Our baseline scenario is that we stay at 0.3% y/y. Read more here: https://nexus.nordea.com/#/article/12661
How about those wages?
Most interesting data from the US is the labour market data on Friday. We expect a 245k gain in nonfarm payrolls in August July 209k, consensus 220k). Unemployment rate should to slip back to 6.1%.
After being unchanged in July the average hourly earnings should revert to the 0.2%-per-month trend rise in August.
A stronger rise in wages would reinforce the impression that the labour market is tighter than the Fed believes. That would increase worries that the Fed might tighten faster than currently expected and put considerable upward pressure in rates.
High expectations for the ECB
We expect soft words from Draghi on Thursday. ECB should lower its projections for growth and inflation and probably give some more insight into an upcoming ABS purchase programme. We expect no rate cuts or QE.
Announcing QE clearly feels premature. Cutting the refi rate now does not sound likely given the weaker EUR and lower short- and long-term rates.
Draghi’s rhetoric will have to be sharper than we expect for current market pricing to be sustainable. Once more it looks likely that the ECB will disappoint.
Auction and central bank spree
This week Germany, Spain and France are on the markets with auctions.
On the macro front, we expect no change in the monetary policies of Bank of England, Bank of Japan or Sweden’s Riksbank this week.
In the US we expect the ISM manufacturing index to rise from July’s 57.1 to 58.0 in August, the highest score since 2011.
Nordea