The euro zone PPI inflation data

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Yesterday, global core bonds had an uneventful trading session. US markets were closed in observance of Labour Day and the thin eco calendar (final EMU PMI’s for August) brought no new surprises. German yield changes ranged between -1.6 bps (5-yr) and +1.4 bps (30-yr), steepening the curve a tad for a second session in a row (profit taking on flatteners). On intra-EMU bond markets, 10-yr yield spread changes versus Germany were small too with some outperformance of Greece (-7 bps) and Portugal (-3 bps), following substantial spread widening in previous two days. Spain underperformed (+3 bps). The Spanish treasury sold a 50-year bond via private placement (see below).

Today, the euro zone eco calendar is again thin with only the PPI inflation data and Spanish unemployment figures (no market movers). The ECB holds its weekly liquidity tender. More interestingly, in the US, the manufacturing ISM will be released besides the construction spending. The UK issues new 2020 Gilt and Norway sells 2024 bonds.

The euro zone PPI inflation data are still July figures and therefore quite outdated. Nevertheless, they might still be interesting, as too low inflation is the main concern in EMU. On a monthly basis, PPI is forecast to have declined by 0.1% M/M, which should push the annual rate down to -1.1% Y/Y from -0.8% Y/Y in June. In Spain, unemployment is forecast to have edged up slightly in August following six consecutive monthly declines. The consensus is looking for an increase by 21 800, at the end of the holiday season. In the US, the manufacturing ISM is forecast to show a marginal decline in August, after reaching its highest level in more than two years in July. The consensus is looking for a drop from 57.1 to 57.0, but we believe that the risks are for a stronger outcome. New orders rose sharply in July, boding well for future activity, while also most regional business confidence indicators improved further in August.

The Spanish debt agency sold its first ever 50-yr bond (4% Oct2064) via private placement. The debt agency placed €1B and now covered 78% of its funding programme. On Thursday, Spain sells more LT debt by tapping the on the run 10-yr Obligacion (2.75% Oct2024) and 30-yr Obligacion (5.15% Oct2044) for a combined €2-3B. According to Director of Treasury & Capital Markets of the Belgian debt agency Leclercq, the treasury plans to keep increasing the average maturity of its portfolio (currently 7.7 years) and conduct slightly fewer auctions next year (7 to 9) than in 2014 (10). For more details on the Belgian funding outlook, please see our OLO-Monitor which appears later today.

Overnight, most Asian equity markets trade positively with Japan outperforming (+ 1.5%). JPY weakness and strong Japanese wage growth data explain today’s strong move. The situation in eastern Ukraine took another turn for the worse, but failed to impact markets for now. Ukrainian Defence Minister Heletey said that the army would stop trying to remove separatists from the east, moving instead to a defensive strategy against what he called a "full-scale invasion" of Russian regular troops (Russian tank division took Lugansk airport). The US Note future trades with a downward bias ahead of US investors returning from Labour day holiday.

Today, the calendar is thin with only US manufacturing ISM. We see risks for a stronger outcome. In that case the market reaction will be interesting. Of late, the US Note future moved higher in lockstep with the German Bund despite the stronger economic recovery and different mindset of the central bank (Fed). Better US figures were bluntly ignored. We think that this week’s US eco reports will remain robust and hope to see a reversal in this reaction pattern, especially in the run-up to Friday’s payrolls report.

In EMU, the centre of gravity comes Thursday (ECB meeting. In the run-up to the ECB meeting, the Bund rallied last week significantly on dovish easing expectations (deflation risk). We believe the market has become stretched in one direction and think some more neutral repositioning is possible ahead of Thursday. Geopolitical tensions remain a wildcard for this strategy.