German yields were seen marginally lower over the past week, led by the belly of the curve. 10-year yields fell about -2 bps to current levels near -.18%, all of it from declines in real yields as inflation expectations held steady. Oa a year-to-date basis, German nominal 10-year yields are up close to +40 bps, but are seen basically flat on the month across real & nominal yields, and breakevens. In credit, 10-year investment grade spreads remain near-frozen, holding at +88 bps near the middle of the somewhat broader but still confined range of roughly +80 bps on the downside and +95 bps on the upside. The DAX equity market index did better over the past week, rising over +100 points, pushing the 15700 level, and nearing upside overhead resistance in the 15800 to 16000 area. On a year-to-date basis, the index is up approximately +14%, but less than +2% over the past month.
In terms of ECB policy expectations, the summer months are apt to be quiet with no material changes in overall market sentiment until we get closer to the September 9 Council Meeting. Until then, inflation is likely to run otter than policymakers would favor, particularly the normally hawkish German constituency, but not hot enough to shatter the overall ECB narrative, sharing that of the US Fed, that near and medium term upward pressure on prices will prove transitory. While 10-year German yields are still seen moving towards and into positive ground before the end of the year, that is not expected until the fall at the earliest.
As much as the debate focuses on how transitory inflation will prove to be, and how all this plays out from a Central Bank policy and policy expectations perspective, it is interesting to hear of a minority voice, growing somewhat louder of late, suggesting that inflation will not only prove transitory, but precede a return to an actual deflationary as opposed to disinflationary environment. In this scenario, prices don’t just begin to flat-line after this period of supply chain bottlenecks and so forth clears, but actually again start feeling the weight of longer term structural forces put merely on hold by the aggressive monetary and fiscal policy response to the pandemic, and ever-more debt accumulation.
The economic calendar in Europe is highlighted by preliminary inflation numbers for the EU, EU Germany, France, Spain, and Italy German unemployment, EU sentiment numbers, and final UK GDP. Government supply issuance is limited to Italian 5s & 10s, and Spanish 3s, 5s, & 10s. In terms of the ECB, we have Lagarde speaking later today.
The US Treasury curve is seen marginally higher and flatter on a week-over-week basis, as Fed rate hike expectations continue to bleed in. 10-year benchmark yields are up about +2 bps over this time to current levels of 1.48%, holding to the recent 2-3 week range around 1.50% central tendency. The move higher was led by a +5 bps increase in inflation expectations, partially offset by a -3 bps decline in real yields to -.82%, as per TIPS market pricing. Credit spreads tightened still further over the past week, as investors remain sanguine on the prospects for near term Fed tapering of bond purchases. On a week-over-week basis, A and BBB rated spreads both narrowed -2 bps to new cycle lows of +82 and +118 bps respectively.
The obvious highlight from the US economic calendar this week is Friday’s nonfarm payrolls report, where the market is looking for a snapback in jobs expansion to 700K from the previous month’s disappointing 559K, and a drop in the unemployment rate to 5.6% from 5.8%. The jobs report is preceded by Conference Board Consumer Confidence, ADP employment, and ISM manufacturing PMI, with factory orders and the trade balance on Friday as well to lead us into the 4th of July holiday break. The jobs report also presents data on wage cost push inflation via its average hourly earnings subcomponents. No Treasury supply is scheduled but we do get the 3s, 10s and 30s announcement for next week.