German yields tried to rebound higher yesterday, but renewed falls in equity markets bought the bid back to bond markets and the German 10-year yield finally ended the day flat. US yields rose: the 10-year yield climbed by around 4bp, though this merely reversed roughly half of the drop seen the day before. Intra-Euro-area spreads narrowed.
Core bonds are likely to remain supported today, though some resistance for further yield falls is starting to show.
Oil prices continued to slide, as did inflation expectations. The 5-year EUR inflation swap is now trading close to 60bp, while the 5-year measure 5 years forward has fallen to new lows below 1.70%.
European equities gave up early gains to record another sizable loss of 2.19% (Stoxx 600). US equities did better, losing only 0.63% (S&P 500). The momentum for equities continues to point to further losses. Asian markets are trading clearly lower this morning, at least outside China. Another challenging day for the equity markets lies ahead.
China’s manufacturing sector still losing momentum
China’s HSBC/Markit manufacturing PMI, released early today, continued to fall, dropping from 50.0 to 49.5. This was the first sub-50 reading in seven months and a clear disappointment. The number continues to point to an economy losing momentum, and increases expectations that more stimulus measures are in store. As the rate cut from the central bank last month illustrated, the Chinese authorities are still not willing to let growth slow down too much.
Russia hikes rates aggressively – the rouble to face more pressure
The Bank of Russia lifted its key rate from 10.5% to 17% last night to limit the risks of devaluation and inflation, which have increased significantly. The move followed another massive 10% hit to the rouble after the central bank had warned the Russian GDP could slump by 4.5% next year, if oil prices remained at USD 60. Despite the rate hike, the rouble will continue to feel pressure as long as oil prices are heading lower, while the challenges in the Russian economy keep mounting.
US capacity utilization rate continues to climb
US industrial production growth beat expectations with a 1.3% m/m jump in November, following growth of 0.1% in October. More importantly, the capacity utilization rate jumped from 79.3% to 80.1%, back to pre-crisis levels (highest since March 2008). The capacity utilization rate thus adds to indicators pointing to inflation pressures picking up in the US economy.
PMIs with some upside potential but does it matter?
Euro-area flash PMIs for December could edge a bit higher on the back of lower oil prices, but such an increase would not really do anything to change the ECB outlook, which will limit the market reaction. French numbers will be released already at 9:00 CET, German ones at 9:30 CET and Euro-area data at 10:00 CET.
Elsewhere in the calendar, the Riksbank will release its latest monetary policy decision at 9:30 CET, UK November CPI will be out at 10:30 CET, while the German ZEW index will see daylight at 11:00 CET. In the US, November housing starts and building permits will have their turn at 14:30 CET and the Markit December flash manufacturing PMI at 15:45 CET.
The ECB’s main refinancing operation results at 11:15 CET will attract some attention as well.
Nordea