Bonds rallied on both sides of the Atlantic on Friday despite positive economic data surprises. The German 10-year yield edged lower by some 1.5bp to 0.78%, the second lowest close on record. The US 10-year yield, in turn, fell 2bp. Curves bull-flattened. Intra-Euro-area bond spreads mostly narrowed a bit.
The course for especially European core yields remains down, and yields should have some more room to fall today.
Equities ended the Friday largely flat. The Stoxx 600 lost 0.07%, while S&P 500 gained 0.02%. Especially Japanese equities have taken a beating this morning after disappointing GDP numbers (see more below), down around 2.5%, pointing to a negative opening also in Europe.
The rating agency Fitch changed its outlook on the Belgian AA rating from stable to negative, citing stalled budget deficit reduction, the worsened growth outlook and deteriorated public debt dynamics. The action delivers a small blow to Belgian bonds after their rather impressive performance lately.
Japan back in recession
Japanese Q3 GDP numbers, released earlier this morning, surprisingly showed the economy having contracted by 1.6% q/q annualized in Q3 following the 7.3% plunge in Q2. Even though a large part of the disappointment was due to falling inventories and private consumption actually posted a modest rebound, the numbers were another sign that the Japanese economy was hit badly by the consumption tax hike in April. The weak data implies Prime Minister Abe will not go ahead with the next phase of the consumption tax hike scheduled for October, and may call snap elections instead.
G20 with growth hopes – Russian crisis receives a lot of focus
The G20 countries once again pledged that raising global growth to deliver better living standards and quality jobs for people across the world is our highest priority. More specifically, the countries commit to work in partnership to lift growth, boost economic resilience and strengthen global institutions, while they set a target of lifting G20’s GDP by at least an additional two per cent by 2018. The statement further noted that tackling global investment and infrastructure shortfalls is crucial to lifting growth, job creation and productivity, and the G20 countries agreed to establish a Global Infrastructure Hub with a four-year mandate to contribute to developing a knowledge-sharing platform and network between governments, the private sector, development banks and other international organisations.
Coordinated economic policies would be very welcome for the global economy, but big goals have been heard many times before without much concrete action.
The Ukrainian crisis received a lot of focus at the meeting, and Russian President Putin received a rather cold welcome. In the end, he left the meeting early. Tensions in Ukraine look likely to increase further in the near future, another factor keeping core bonds supported.
US retail sales with a big bounce
US retail sales surprised positively in October after the disappointing September report. The control group that filters into GDP jumped by 0.5%, while the 0.2% decline originally reported for September was revised to flat. The momentum in retail sales is thus much better than implied by the September report, and the US economic performance in general continues to be rather positive.
University of Michigan consumer confidence, in turn, jumped from 86.9 to 89.4, the best reading since 2007.
Euro area able to show some growth
Euro-area Q3 GDP numbers were a small positive surprise. Growth came in at 0.2% q/q in Q3 after an upward-revised 0.1% in the previous quarter. German, French and Spanish economies expanded, while the Italian one continued to contract. Spanish y/y growth has now risen to 1.6%, illustrating all the progress the country has made, while Greek growth reached 1.4%.
To put the numbers into context, 0.2% (actually 0.16%) q/q growth should be seen as week by almost any measure, and such subdued growth is not enough to bring inflation higher. More ECB easing is thus in the cards going forward.
Euro-area PMIs, Fed minutes and US CPI ahead – Draghi to speak today
The highlights in this week’s calendar are the Fed minutes on Wednesday and Euro-area November flash PMIs as well as US October CPI on Thursday. Fed minutes will shed more light behind the somewhat more hawkish statement, while US core inflation is likely to creep higher. Euro-area PMIs, in turn, have potential to edge slightly higher.
Elsewhere in the calendar, UK October CPI will be released tomorrow, the Bank of Japan will conclude its meeting on Wednesday, while Chinese November Markit / HSBC manufacturing PMI will be out on Thursday.
In today’s calendar, the highlight will be ECB President Draghi’s testimony before the Committee on Economic and Monetary Affairs of the European Parliament at 15:00 CET. In addition, the ECB’s Mersch will speak at 10:00 CET, Praet at 14:30 CET, Cœuré at 15:45 CET and the Fed’s Evans at 16:00 CET.
In terms of economic data releases, the New York Fed manufacturing index will be released at 14:30 CET and US October industrial production at 15:15 CET. Finally, the ECB will announce its covered bond purchase volumes at 15:30 CET.
Belgian, Spanish and French supply ahead
Belgium will set this week’s EUR government bond auctions in motion today, when it will sell bonds maturing in 2019 and 2024 for a combined EUR 1.5 to 2bn. Spain and France will have their turn on Thursday. France will sell 3- and 5-year nominal bonds for a total of EUR 6.5 to 7.5bn as well as inflation-linkers maturing in 2023, 2027 and 2040 for EUR 0.8 to 1.3bn. Spain, in turn, will sell bonds maturing in 2017, 2020 and 2041.
Nordea