German yields moved lower still on a week-over-week basis, as 10-year Bund yields fell -5 bps to -.23%, the lowest/most inverted level in almost a month. For the immediate term, the interim June 11 lows of -.27% is seen tracing out as downside resistance, with upside support tracing out at -.15%. In credit, 10-year investment grade spreads held steady at +87 bps, holding to the relatively tight 2021 range of approximately +80 bps on the downside and +95 bps on the upside. The DAX stock market index fell back on the week, holding recent ranges inside formidable upside resistance in the 15800 to 16000 area.
Unlike the US, where energy prices, along with food and housing, are conveniently excluded from core CPI and PCE deflator aggregates, the ECB’s own inflation gauges do and will capture the runup in oil. This week, oil prices move to new multiple-year highs on a breakdown in OPEC talks, with at least marginal “stagflationary” consequences for the European economy. While increased prices acts as a headwind to growth, the mechanical upward adjustment to CPI measures is apt to make it increasingly difficult for policymakers to justify their inaction on tapering on the basis of “transitory” inflation. We noted as well recently an expressed view by ECB policymakers that housing prices should as well be factored into the overall calculation of measured inflation, something that would obviously lead to even more overshooting of currently-defined targets. Of note, Australia’s RBA signaled as the Bank of Canada and BOE before it an intent to start incrementally paring back on so-called emergency bond purchases from $5 billion AUD per week to $4 bln, extending however the overall program from September to November.
Tuesday’s economic data out of Germany was very weak, with both factory orders and ZEW sentiment numbers coming out well inside consensus expectations. The economic calendar in Europe includes German industrial production, German trade, UK industrial & manufacturing production, and UK GDP. On the Government supply front, we see UK 10-year Gilts on Tuesday, German 5s on Wednesday, and Italian 10s on Friday. ECB President Lagarde speaks on Friday.
US Treasuries did better on a week-over-week basis, led by the belly of the curve. 10-year benchmark yields fell -5 bps to 1.43%, with real yields down a full -7 bps to -.89% to more than offset a +2 bps increase in breakevens, as per TIPS market pricing. Credit spreads were seen marginally tighter still on the week at +82 bps in A-rated space, and +118 bps in BBBs. At cycle lows, current spread levels do not in our view adequately compensate for risk as we move ever-closer with every week to eventual Fed tapering of its bond purchase program.
From the US economic calendar this week, we have US services and composite numbers on Tuesday, and JOLTS job openings on Wednesday. More importantly, we get a deeper-dive look inside the collective mindset of the Fed with the release of the June 16 FOMC meeting minutes. There is no new Treasury supply scheduled this week, but we do get the announcement for next week’s lineup of 3s, 10s, and 30s.