Core bond yields climbed a bit yesterday, with the German 10-year yield ending the day higher by 2bp and the curve steepened some. In the US, the rise in the 10-year yield was only around a bp. Intra-Euro-area spreads narrowed, but the moves were not particularly large.
Core yields are set to see some upward pressure this morning stemming from upcoming supply, but the ECB’s message in the afternoon should keep bonds supported (see more below).
European equities stormed higher, with the Stoxx 600 jumping by 1.66%. In the US, the gains were more modest and S&P 500 advanced by 0.57%. Asian equities are trading mixed to lower this morning, and also Europe is set to open slightly lower.
US labour market recovery looking ever stronger
Yesterday’s data package provided yet more evidence that the US labour market recovery is gaining even more momentum. The ADP employment index showed a pick-up in job creation to 230k, the second highest reading seen this year. The employment index in the non-manufacturing ISM index, in turn, mirrored the earlier gain seen in the manufacturing survey with a rise from 58.5 to 59.6, the best reading since 2005 (the headline non-manufacturing ISM retreated from 58.6 to 57.1).
Yesterday’s data did not hurt the bond market much, but Friday’s official numbers have the potential to do more damage, but only if they also point to increasing price pressures.
Does the ECB have the patience to wait?
Last year, the ECB was widely expected to cut rates in December. The central bank knew of these expectations and it was obvious already then that the forecasts would need to be taken down in December: the ECB cut rates already in November. This time bears plenty of similarities compared to last year, and a surprise easing already today looks very possible again. The most likely easing step, if one were to be taken today, seems to be tweaking with the terms of the TLTROs. Such tweaking would be far from convincing, and the market reaction would depend more on the overall message, which should continue to be dovish. At a minimum then, the door should be left wide open for doing more, especially now that the Fed has taken a slightly more hawkish stance, which should continue to support Euro-area bonds in general.
The ECB will release its interest rate decision at 13:45 CET, while the press conference is set to start at 14:30 CET.
Elsewhere in the calendar, German September factory orders will be watched at 8:00 CET, UK September industrial production will be out at 10:30 CET, the Bank of England will reveal its interest rate decision at 13:00 CET, while US jobless claims and Q3 unit labour cost and productivity data will be released at 14:30 CET. In addition, Euro-area finance ministers will meet at 16:30 CET to discuss Greece, among other things, while the Fed’s Evans will speak at 16:40 CET and Powell at 19:30 CET.
Spanish and French supply
Bond auctions will continue today in size. Spain will sell bonds maturing in 2017, 2023 and 2024 for a total of EUR 2 to 3bn. France, in turn, will re-open 10-, 15- and 20-year bonds for a combined EUR 7.5 to 8.5bn. These auctions should put some upward pressure on yields this morning.
Nordea