EMU inflation and US wages dominant factors

Rates

US Q2 GDP decent. Sufficient for September lift-off?

Global core bonds closed yesterday’s session higher (Germany) to mixed (US Treasuries). In a daily perspective, the German yield curve bull flattened with yield changes ranging between -0.2 (2-yr) and -8 bps (30-yr). The bear flattening of the US yield curve suggests that markets takes into account the combination of a slightly hawkish Fed statement and decent US eco data. The front end of the US curve underperformed with yields up to 2.4 bps higher (2-yr) and lower from the 3-to-the 30-year (-3.3 to -8 bps). Initially, bonds reacted still on the FOMC statement that left the possibility of an Fed lift-off in September wide open. However, European bonds soon moved higher, ignoring stronger than expected EC confidence indicators. During US dealings, focus went to the Q2 GDP release. Markets didn’t really know what to do with it. The Q2 headline at 2.3% was decent but slightly below expectations. However Q1 was revised higher to 0.6% from -0.2%. Finally the revisions of the past 3 years resulted in a 1%-point lowering of GDP. PCE and core PCE deflator reading were higher at 2% and 1.8% respectively (QoQa). After hesitation, US Treasuries and Bunds went higher, helped by end of quarter extension buying (US).The Bund currently tests first important resistance at 154.24 and closed marginally above at 154.34.

Greek PM Tsipras Syriza party central committee decided to call for a September emergency party congress to overthink the party’s strategy and overcome internal quarrels with the extremist Left Platform. The motion to hold a referendum on Sunday by the left wing was rejected, a victory for PM Tsipras, who first wants to conclude negotiations on the third package. The emergency congress will then examine the bailout. The situation is still very unclear. Will it endanger current talks? Will a national referendum be called on a new third bailout package? A split of the Syriza party and possible snap elections remain also a possibility that might impact the current talks and parliamentary approval.

EMU inflation and US Empl. cost index focal eco reports today

In June, euro zone HICP inflation ended its 4-month uptrend, declining from 0.3% Y/Y to 0.2% Y/Y. For July, the consensus is looking for a stabilization in headline inflation. Yesterday however, Spanish inflation data showed an unexpected decline, while German inflation stayed unchanged suggesting some risks for a downward surprise. Core inflation is expected flat at 0.8% Y/Y. For the core reading too, we believe that the eventual risks are for a downward surprise. The EMU unemployment rate is expected to have dropped further to 11% following a stabilization in May at 11.1%. In the US, the Employment Cost Index will be closely watched as it is a good pointer for wage growth and the latest update for this indicator ahead of the September FOMC meeting. The consensus is looking for an increase by 0.6% Q/Q in Q2, following a 0.7% Q/Q rise in Q1. Especially the wages and salaries sub-indicator will be closely watched. We believe that the risks are for an upward surprise. The final reading of U. of Michigan consumer confidence for July is expected to show a limited upward revision from 93.3 to 94.0, but still down from 96.1 in June. Despite the poor Conference Board’s indicator, we still see risks for a stronger outcome, supported by lower oil prices and easing tensions regarding Greece and China.

Today: EMU inflation and US wages dominant factors

Overnight, Asian equity indices trade mostly slightly positive with China about flat and Japan marginally up. Japanese data were mixed (see headlines). US Treasuries are flat, suggesting a fairly neutral opening of the Bund. The overall European market should start trading with a slight risk-on bias.

Today, the eco calendar is again busy and with market moving potential. A second straight decline of EMU inflation would be a positive for the Bund, as it also affects inflation expectations. More important might be the US eco data for which we see upside risks. Especially the Employment Cost Index will be closely eyed for signs that wage growth is accelerating. Such signs would be welcomed by the Fed and strengthen the case for a nearby lift-off (September), which might push US yields higher with the 2-year yield testing already resistance at about 0.75% (see graph higher). A weaker than expected outcome on the contrary combined with end of month buying and the end of the monthly refinancing may help US Treasuries higher. We would closely watch the Bund (testing 154.24) for signs the uptrend is exhausted (which doesn’t seem the case and may even lead towards 155.44 high). We wouldn’t though envisage Bund long positions anymore. For the T-Note future, it is still in its sideways range (127-23 to 124-14+) and we prefer a sell-on upticks preferable near the upper boundary.