US initial jobless claims will give more input about the state of the US labour market

Market movers today

• We expect euro flash CPI for July to reach a new cycle low at 0.4% y/y (consensus 0.5% y/y) down from 0.5% y/y in June. Releases out of Germany and Spain yesterday showed a decline to 0.8% y/y (from 1.0% y/y) and -0.3% y/y (from 0.0% y/y), suggesting that we are also going to see lower overall euro inflation in July. Euro unemployment rate is expected to stay unchanged at 11.6% after falling last month. The unemployment rate has started to trend gradually lower after hitting a peak in Q3 last year at 12.0%.

• US initial jobless claims will give more input about the state of the US labour market. Last week initial claims fell to 284k and the four-week moving average was 302k, the lowest level since 2007. It clearly shows the US job market is gaining momentum currently.

• Chicago PMI for July is released, which will be the last main regional survey before ISM manufacturing on Friday. Consensus looks for a broadly flat reading at 63.0, clearly above the long-term average of 55.2.

Selected market news

In the statement from the FOMC meeting yesterday the Fed made a shift towards a more hawkish stance by changing the language on both the labour market and inflation in a slightly more positive direction, see Fed makes a hawkish twist - we now see the first hike in April 2015, 30 July. The risk is now that future Fed hikes will come earlier and less gradual than what is implied by the current Fed projections and not least by market pricing. The first rate hike is now priced approximately in one year’s time.

Given the change in rhetoric, we now expect the Fed to hike rates in April 2015 rather than mid-2015. As unemployment continues to fall and inflation increases we believe the rise in short end yields is likely to continue as the market starts to price in earlier rate hikes. Higher US rates are also expected to support a further decline in EUR/USD as EUR short rates are still expected to be kept very low for the foreseeable future by the ECB. The more upbeat rhetoric from the Fed came on top of strong US GDP numbers earlier in the day. US GDP rose 4.0% q/q annualised in Q2, well above market expectations, and also noteworthy, the weak Q1 numbers were revised in a positive direction. Especially, we note that the engine of the US economy – goods consumption - rose on average 3.6% q/q annualised in H1.

Both European and US long yields have been trading lower this year, with especially European markets testing record-low levels, but yesterday we saw a pick-up in yields for a change. 10Y US treasury yields rose close to 10bp during the session and a negative opening in Europe is expected this morning despite the fact that the European bond market took a beating yesterday after the US GDP numbers and a relatively weak 7-year treasury auction.

Last night Argentina was declared in default by S&P as it missed the deadline for paying interest on USD13bn of restructured bonds. The default is not really a surprise and we see no significant contagion effects on global markets.