Last week was a positive week for USTs. On Tuesday, the weaker than expected June ISM services reading of 60.1, which while still in strongly expansionary territory, fell short of expectations (Bloomberg survey) of 63. It was also a significant drop from the prior reading of 64. The yield on the UST 10 year yield tightened below 1.3% midweek ahead of the release of the June 15-16 FOMC meeting minutes. The minutes, released Wednesday, showed that tapering was discussed although no timeline was given. The minutes noted “Various participants mentioned that they expected the conditions for beginning to reduce the pace of asset purchases to be met somewhat earlier than they had anticipated at previous meetings.” However, “The committee’s standard of “substantial further progress” was generally seen as not having yet been met, though participants expected progress to continue”. Following this, the UST 10 year yield continued to tighten breaching 1.25% on Thursday as investors took a sanguine view on inflationary pressures and focused on the easing momentum in some of the economic data. That said, the move retraced somewhat on Friday. Over the week, the yield on the UST 10 year tightened 7bps to 1.36% and the UST 30 year yield tightened 5bps to 1.99%. The 5s30s spread widened 2bps to 120bps over the week. The S&P 500 gained 0.5% and both the S&P 500 and Nasdaq made new highs.
On Thursday details of the ECB’s strategy review and inflation target which is to be applied from the July 22 meeting were released. The ECB will adopt an inflation target of 2% over the medium term shifting away from the “below, but close to, 2%” target. ECB President Christine Lagarde commented: “The new formulation removes any possible ambiguity and resolutely conveys that 2% is not a ceiling,” and that “What we want to do is to avoid the negative deviation that will entrench inflation expectations.” The minutes of the June meeting also showed continued support for the PEPP bond buying although the decision was not unanimous. Plus, there were some renewed concerns about the spread of the Delta variant adding to a risk-off bias. The UST move and this backdrop was generally supportive of core Eurozone Government Bonds.
Other central bank news included the RBA meeting where they announced that once the current bond buying programme of A$5bn per week ends in September it will move to A$4bn per week of purchases with a review in November. The yield target horizon for the bond buying was not extended and kept at April 2024. On Friday, the PBoC cut the reserve requirement by 0.5% for most banks; there have been signs that growth momentum has been easing in recent data points; earlier in the week the Caixin services PMI for June disappointed coming in at 50.3 versus the Bloomberg survey of 54.9 and the prior reading of 55.1. Adding to the theme of waning growth momentum UK GDP grew 0.8% in May which was below expectations of 1.5% mom; the ONS said that the manufacturing sector was hit by chip shortages. The other main news was the breakdown of OPEC+ talks to agree on a production increase with a disagreement between Saudi Arabia and the UAE over the measurement of this. The Brent crude oil price initially moved higher on the back of the news but then retraced ending the week -0.81% at USD 75.55 per barrel.
In the week ahead, the spread of the covid Delta variant continues to be a concern, particularly in less vaccinated parts of the world. Last week Japan placed Tokyo back under restrictions and the Olympics will now be held without spectators and Australia continues to battle an outbreak. Meanwhile in the UK Boris Johnson is expected to confirm England’s reopening plans today. This week central bank rate/monetary policy decisions are due from RBNZ and the Bank of Canada; market participants will be looking to see if the BoC move to undertake any further bond tapering. On Friday, the BoJ decision is also due, along with updated economic forecasts with growth estimates expected to be revised down for the current fiscal year. This will be followed by a press conference with the Governor Haruhiko Kuroda. Elsewhere, a number of central bank speakers are due to appear this week. Notably, Jerome Powell is due to appear before the House Financial Services Committee on Tuesday and then on Thursday he appears before the Senate Banking Committee to deliver the Semi-Annual Monetary Progress Report. Other Fed speakers appearing include Neel Kashkari, Raphael Bostic, Eric Rosengren, Charles Evans and John Williams. BoE speakers include the Deputy Governor David Ramsden and policy maker Michael Saunders. ECB speakers appearing this week include Board members Luis de Guindos and Isabel Schnabel.
Data-wise the June US inflation data which is due for release on Tuesday and Wednesday is likely to be a key focus, although there are a good number of other economic data points due. The market (Bloomberg survey) is looking for headline CPI to increase 4.9% yoy and for the core rate to increase 4% yoy. Expectations are for the headline reading for PPI to increase 6.7% yoy compared to the prior reading of 6.6% yoy. Other US data releases/surveys include the Beige Book on Wednesday, and the Empire Manufacturing and Philadelphia Fed Business Outlook gauges are due on Thursday. On Friday retail sales data for June is due with the market looking for the headline rate to come in -0.4% mom. The preliminary reading for the July University of Michigan Sentiment gauge is also due with the market (Bloomberg survey) looking for an improvement on the prior reading of 85.5 to 86.5. Elsewhere, the final reading of the Eurozone June CPI is due on Friday and the UK CPI data for June is due on Wednesday with the Bloomberg survey looking for a reading of 2.2%. China data releases this week include the June trade data earlier in the week and Q2 GDP on Wednesday where the market is looking for a 1% qoq increase. June retail sales and industrial production data are also due midweek with expectations for an increase of 10.9% yoy and 7.9% yoy respectively.