Growth in the US economy is healthy, but wages pick up only modestly. This is what we take away from Friday’s GDP and employment cost data. Our conclusion is that a Fed rate hike in September now seems more likely than one in June.
Euro-area inflation fell sharply to -0.6% y/y in January and this is not yet the trough. We see no signs of “bad deflation” like consumers taking a wait-and-see stance.
Russia’s central bank joined the ranks of those surprising with a rate cut. The RUB came under pressure.
Week ahead
The week starts off with Swedish manufacturing PMI numbers today at 8.30 CET. Focus will then shift to US data with the manufacturing ISM at 16.00 CET. We expect it to go down more than the consensus but it should remain on a solid level.
There is a number of central bank meetings during the week, including the BoE on Thursday. And then on Friday the US employment report. January payrolls have a tendency to disappoint. Our take is a sub-consensus 200k rise in payrolls.
Rates
German yields continued to head lower on Friday. The reaction to another downward surprise in the Euro area was muted, but disappointing US data gave also German bonds a small boost later. The 10-year yield was trading around its record lows of 0.33% on Friday, and the trend remains clearly down.
There was strong receiver interest in the very long end of the EUR swap curve again, and the ultra-long end saw the biggest falls. The 50-year swap rate tumbled by around 6 bp.
Intra-Euro-area bond spreads saw mixed moves on Friday, with semi-core spreads narrowing, while for instance Spanish and Italian spreads Germany edged wider. Greek yields experienced a clear jump again, and the direction remains up.
We find interesting opportunities in the EUR government bond markets in light of the structure of the ECB’s upcoming sovereign bond purchases.
US Treasuries saw a big rally following disappointing GDP and employment cost data on Friday. The 10-year yield plunged by some 8 bp to its lowest levels since May 2013. The underlying demand for bonds certainly remains strong, and we would need to see strong payrolls and wage data on Friday to challenge the downtrend in yields.
This week’s EUR government bond auctions will be concentrated on Wednesday and Thursday. Finland will hold a bond auction on Wednesday, while Spain and France will sell bonds on Thursday.
FX
Despite rising expectations ahead of the Riksbank’s next meeting, accounts have sold USD to bring home profits, which has pushed the SEK in a stronger direction versus the EUR. When this process is over, the SEK seems likely to weaken, probably in the run-up to the Riksbank’s February meeting. The decision from Norges Bank to increase daily purchases of NOK helped boost both Scandi currencies on Friday.
Today’s ISM manufacturing release could further test the market’s confidence in the US economy after the lacklustre wage growth last week. This could prompt some USD weakness on profit-taking. Several markets indeed seem to be pricing in a further distinct deterioration in world growth (see for example Baltic Dry and long bond yields). When all is said and done, however, the USD will still be the cleanest shirt in the laundry.
Nordea