German benchmark government yields were seen little changed on a week-over-week basis, as the ECB delivered enough of a dovish message to calm investor pending policy shift concerns. 10-year Bund yields rose only fractionally to -.31%, with a -8 basis point decline in real yields slightly more than offset by a +9 basis point increase in inflation breakevens, as per linker market pricing. Technically, we continue to see good downside resistance at the recent 7 month double-bottom low near -.50%, against lines of upside support at -.29%, -.15%, and -.08% In credit, IG spreads held steady near 93 bps, towards the top end of the prevailing range. High yield spreads however fell back roughly -6 bps to 293 bps as the correction from recent interim highs just inside 310 basis points advanced. European equities gave way to similar corrective forces as seen in the US, as the DAX index slipped back to the low 15700s.
The economic calendar in Europe this week kicked off with stronger employment data out of the UK. For the balance of the week, we see an assortment of inflation numbers out of the UK on Wednesday, UK retail sales on Friday, and a smattering of final individual country HICP inflation revisions throughout. With respect to government supply in Europe this week, the EU will be raising by way of syndication 9 billion euros in 7-year bonds, with the proceeds earmarked for the Covid recovery fund. As well, we get German 2s, Italian 3s, 7s & 30s, and UK 5-year Gilts on Tuesday, UK 10-year Gilts on Wednesday, and French 3s & 5s, and Spanish 3s, 5s & 10s on Thursday, as well as a Dutch 30-year reopening in a heavy week of supply out of Europe.
The ECB’s McCaul, Lane, and Lagarde are all scheduled to speak this week, and as well the G20 Finance and Central Bank Deputies Meeting underway as of Monday. At last week’s policy meeting, the ECB raised its inflation forecast for both this year and the subsequent two from those of the staff projections in June, saying however the upward price pressure bias from special factors should in all likelihood ease off beginning next year. PEPP bond purchases were pared back only nominally. On Monday, ECB policymaker Schnabel from Germany reaffirmed the Board’s readiness to act if this expected easing fails to materialize next year.
US benchmark government yields retreated modestly this past week, led by the long end of flattening curve. 10-year nominal yields fell -4 bps on a week-over-week basis, largely on a fallback in real yields, as per TIPS market pricing. Inflation breakevens dipped only slightly. The 2-10s curve moved back down to 112 bps on the bull-flattening. 10-year investment grade (IG) spreads narrowed in a couple of bps to 138 bps on the week, led by the higher credit spectrum.
The economic calendar in the US is highlighted by Tuesday’s CPI report, with investors looking at a consensus of +.3% m/m and +4.2% y/y on core. The balance of the week presents NFIB business optimism on Tuesday, import/export prices and industrial production/capacity utilization on Wednesday, retail sales, Philly Fed & TICS capital flows on Thursday, and Michigan Sentiment on Friday. Nothing is scheduled in terms of government supply this week, but we do get the supply announcement for next week’s lineup of 20s, 2-year FRNs and 10-year TIPS on Thursday. No Fedspeak is scheduled this week as we move into blackout in front of the Sep 21-23 FOMC meeting.
