Market-based inflation on the rise and rising global yields

The COVID-19 spreading seems to have finally peaked in hot spots such as the US but, at the same time, we observe local/regional outbreaks. In many European countries, such as Germany, France, Belgium, the Netherlands, the UK and Denmark, the number of new cases has moved slightly higher, although we believe it is too early to call these second waves. At the same time, New Zealand recorded its first new COVID-19 case in more than 100 days this week. In other words, we have begun the 'dancing' part of the 'hammer and dance' strategy, which will probably continue until a vaccine is ready. We do not expect the global economy to return to a lockdown similar to that seen in March/April but to narrow in on specific sectors and regions that may be hit, notably tourism. The general risk-on sentiment in markets prevailing in recent weeks continued this week and we do not see an obvious case for this to change in the very near term. In bond markets, we saw a decent rise in European yields, which notably sent 10Y Bunds 10bp higher and are now approaching the upper end of the range since early July. The drivers are the US (which has risen some 15bp this year) and lower ECB purchases. We do not expect the rise in yields will be more persistent, as it is more related to flow dynamics given the solid increase in issuance of US Treasuries in Q3, as well as a more modest pace of ECB buying at the start of August. At the same time, the higher-than-expected US inflation print this week supports the general rise in inflation, leaving real rates not far from record low levels.

On Friday next week, we are set to get the PMI data, which we expect to show a continued gradual uptrend in August, although at a slightly slower pace to reflect the catch-up in activity of previous prints. The ZEW last week and our high frequency monitor have turned positive again, see more High Frequency Activity Tracker: Europe nearing normality, 12 August 2020. ECB minutes are due to be published on Thursday, albeit we expect they will probably not attract much attention.

We are also due to get euro area consumer confidence, which will be particularly interesting as the uptrend stalled in July. The August number will indicate if that was just a blip or whether European consumers are turning more cautious in their spending patterns (and increasing precautionary savings), not least with the lingering unemployment risks. If it is the latter, it could still jeopardise a strong recovery in private consumption in H2 20.

This weekend, the focus (at least momentarily) turns to the US-China trade war. Tomorrow (Saturday, 15 August), Senior US and Chinese officials will review the implementation of their Phase 1 trade deal and discuss other issues or areas of conflict between the two countries. Last week, US President Trump's economic advisor Larry Kudlow said that the trade deal is "fine" and China is "substantially" increasing purchases of American goods. However, given the tense relations between the two countries and approaching US elections, we do not preclude negative headlines emerging from the meeting.

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