German government bond yields were seen higher on the week, with a noticeable curve-steepening bias, driven by higher-than-expected EZ inflation data. 10-year yields themselves increased a full +8 bps to -.40%, led by rising inflation expectations, as evidenced by inflation-linker market pricing. Upside technical support is now being tested, with follow-up support seen near -.30%, and then the 2021 high around the -.08% level. We hold to our view that a move back into positive ground is unlikely at least through the balance of the year. That said, we see modestly more upside in the 10-year Bund yield than downside, with last year’s secular low at -.71% not likely to be challenged any time soon.
10-year IG spreads in EUR inched out to 93 bps, looking increasingly ready to test topside resistance to the prevailing range in the mid ‘90s. High yield did better, as the widening trend in spreads over the past couple of months took a breather. Proxy 10-year HY spreads narrowed in a few bps to current levels near 304 basis points over the past week. The DAX index was little changed on the week at just inside 15900, near the middle of what we have been calling a heavy upside band of resistance in the 15800-16000 area.
On Monday, German HICP inflation fell in line with consensus expectations, even as the Spanish numbers and EZ consumer inflation expectations both came out on the wide side of the consensus. On Tuesday, the flash inflation numbers for the EZ came out materially higher-than-expected, while the German employment numbers were on balance slightly better than forecast. The balance of the week presents a mixed bag of individual country inflation, quarterly GDP, and PMI releases. Government supply in Europe this week features Italian 5s & 10s on Tuesday, German 5s on Wednesday, and French 10s & Spanish 10s on Thursday. Greece will be launching a syndicated reopening of 5s and 10s in the near future, as just announced.
US benchmark government yields edged lower on a week-over-week basis. Nominal 10-year yields fell a basis point to 1.29%, with a -6 basis point drop in real yields offset by a matching rise in breakeven inflation expectations, as per TIPS market pricing. The 2-10s curve steepened slightly to 109 bps. Over the near term the market is focused on Friday’s jobs numbers, and beyond that on Congressional budgetary and debt ceiling deliberations.
On balance, US credit spreads narrowed in this past week. 10-year investment grade (IG) spreads tightened in about a basis point to 141 bps. Lower-grade BB credits outperformed with proxy 10-year spreads in -5 basis points to 241 bps. The market appeared relieved on Powell’s Jackson Hole symposium guarded words that the start of tapering “could” be sometime “this year”, as well as his reiteration of the Fed’s lack of any rush to tighten monetary policy and of inflationary price pressures being transitory.
The highlight for the week in the US is Friday’s nonfarm payrolls report, as investors look for +750K on the headline number, a trimming in the unemployment rate from the previous month’s 5.4% to 5.2% in August, and a dip in hourly wages from +.4% m/m to +.3%. In front of that, we get Consumer Confidence on Tuesday, ADP employment and manufacturing PMIs on Wednesday, factory orders and the trade balance on Thursday. The week finishes off with Friday’s services PMI report. No Treasury supply is scheduled this week, but we do get the supply announcement for next week’s lineup of 3s, 10s, and 30s on Thursday. Fed voting member Bostic speaks on both Wednesday and Thursday, as a follow-up to last week’s Jackson Hole