Bund yields hit new record low

Chris Scicluna

While there was again little in the way of domestic economic news to steer the markets, today saw a weaker showing from Asian equities, as geopolitical concerns weighed. US-Iran tensions seemingly ratcheted up a gear after Trump signed an executive order imposing new sanctions on Iranian officials, and expectations of a breakthrough on trade with China later this week in Osaka remained low despite news of a phone call between US Trade Representative Lighthizer and Chinese Vice Premier Liu He. So, Japan’s Topix closed down 0.3%, as the yen appreciated through ¥107/$ for the first time in fourteen months. And Chinese equities fared worse with the CSI300 closing down 1.0%, while Hong Kong’s Hang Seng is currently down a little more than that.

In fixed income markets, while JGBs were little changed, USTs made further modest gains (10Y yields now below 2.00%) and most euro area govvies (except BTPs) have followed suit this morning (e.g. yields on 10Y Bunds are down a further 2bps to a new record low of -0.33%) despite a relatively favourable French INSEE business survey (detail below). Following Asia, European equities have also opened lower. Looking ahead, the economics newsflow will include a UK retail survey and plenty of new releases from the US housing market. But of most interest will be the latest Fed-speak, with Chair Jay Powell and Vice Chair Williams among the FOMC members set to speak publicly today.

Euro area:
Yesterday’s German ifo business survey suggested that, principally due to the travails of the manufacturing sector, economic momentum in the euro area’s largest member state continues to weaken. Indeed, the headline business climate index fell in June to the lowest level since November 2014, with the expectations index down to a level that, bar February’s, was the lowest since 2012. However, this morning’s INSEE business survey – the French equivalent of the ifo survey – suggested that conditions in the euro area’s second-largest member state remained stable at the end of Q2, and consistent with steady economic growth.

In particular, the INSEE composite business climate indicator remained unchanged for a third month at 106, well above the long-run average, and – with the Q2 average the best since Q318 – consistent with ongoing steady economic growth. Admittedly, the survey suggested softening in manufacturing, with the respective index down 2pts to 102, a touch below the Q1 average, weighed by a significant drop in new orders. But it also implied little change in retail, wholesale and construction, and an improvement in services (for which the index rose 1pt to 107, close to the top of range of the past year or so). In addition, having weakened in May, the INSEE employment climate measure improved in June, and also remained well above the long-run average, thanks this time around to an improvement in services and among temporary work agencies.

Overall, therefore, while today’s INSEE survey was not quite as upbeat as Friday’s French flash PMIs, it did suggest that conditions in France remain more favourable than in its larger neighbour. That is thanks not least to the relatively smaller share of economic activity accounted for by manufacturing, as well as the support provided by Macron’s fiscal stimulus.

It was another quiet day for economic news from Japan, with the only new data release being May’s services producer price report. Just as services CPI inflation fell back last month (down 0.2ppt to 0.3%Y/Y) reflecting shifts in energy prices and the reversal of the temporary impact of the extended Golden Week, so too did the services PPI rate. Indeed, services PPI inflation declined 0.2ppt to a fourteen-month low of 0.8%Y/Y, with transportation (down 0.5ppt to 1.2%Y/Y), hotels (down 2.8ppts to 2.9%Y/Y) and advertising (down 0.5ppt to 1.8%Y/Y) the principal drivers of the drop in pipeline price pressure.

After a quiet start to the week for UK economic data, today will bring the CBI’s latest Distributive Trades Survey, which seems highly likely to suggest that retail sales remained subdued in June after declining in April and May. But the Conservative leadership contest will remain the principal focus, with the populist Boris Johnson still evidently highly popular among party members despite the obvious incoherence of his Brexit policy – which was again laid bare in a hastily arranged BBC interview last night – and profound questions about character. Given Johnson’s attempts to hide from full scrutiny, however, this evening’s planned Sky TV debate with his opponent Jeremy Hunt will not go ahead. Finally, and more mundanely, in the bond market the DMO will sell 30Y Gilts today.

In the US, plenty of data related to the housing market are due, including May new home sales figures and the April FHFA and S&P CoreLogic Case Shiller indices for April. In addition, the Conference Board consumer confidence indices and Richmond Fed manufacturing survey for June are scheduled for release along with revisions to existing retail sales figures.

More notably perhaps, there’s plenty of Fed-speak to look forward to, after yesterday saw Dallas Fed President Robert Kaplan (a voting member of the FOMC next year) note his concern that “adding monetary stimulus, at this juncture, would contribute to a build-up of imbalances in the economy which may ultimately prove to be difficult and painful to manage”. Most notably today, Fed Chair Powell will speak on the Economic Outlook and Monetary Policy at the Council on Foreign Relations, while Vice Chair Williams, as well as FOMC members Bullard (a dovish voter this year), and Bostic and Barkin (voters in 2021) will also speak publicly. In the bond market, the Treasury will sell 2Y Notes.



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