Most global bond markets suffered a third consecutive week of sell-offs, although losses eased on Wednesday after US Federal Reserve (Fed) chair Janet Yellen questioned persistent low inflation, something that until now the Fed had dismissed as temporary. Despite’s Wednesday’s sovereign rally...
fixed income asset classes continued to suffer from expectations of higher growth and rising interest rates ahead. A strong US jobs report on Friday pushed Treasury yields higher, with the benchmark 10-year yield reaching 2.38% at the end of last week. The Bank of Canada raised its leading overnight interest rate by 25 basis points to 0.75%, the first central bank to hike rates after as many as four leading central banks came out of a meeting in Portugal on June 28 with hawkish messages. The week’s survivors included US mortgage and asset-backed securities, which could benefit from a rising rate environment as some bear floating rates. Asian bonds also delivered positive returns over the past five trading days, mostly led by positive news from China and Japan, whose leading Tankan survey of business confidence reached its highest level since 2014. The US dollar retreated as other currencies, such as the euro, gained on the back of the region’s improved outlook. Emerging Market (EM) currencies rallied against a falling US dollar, with the Mexican peso and the Brazilian real adding 2.4% and 2.5%, respectively, against the greenback.
ON THE RISE
Germany exports – sixth gear: German exports accelerated at an annualised pace of 8.7% in May, the fastest since 2015, adding evidence of Europe’s recovery momentum. The increasing number of cars and machinery shipped out of Germany has been helped by a weak euro, especially over the past few years, as shown in the chart. Strong export growth has pushed Germany’s Current Account Balance to as high as 8.6% of Gross Domestic Product (GDP), which is a positive for Germany, but also implies a deficit elsewhere. Some of Germany’s leading trading partners are indeed running Current Account deficits, of 2.4% of GDP in the US, and 3.9% in Britain. Some observers, however, say that for Germany or for Europe to finally come out of a gloomy decade and generate inflation, Germany needs to start saving less and consuming more – therefore increasing its imports and reducing its Current Account surplus. With the euro on the up, boosted by the region’s momentum, some investors believe Germans may start to loosen up and hit the shops, a move that would be welcome by its neighbours and trading partners.
Shop more, export less – trading partners tell Germany
Source: Bloomberg as of 12 July 2017. YoY is year-on-year. RHS is Right hand side. USD is US dollar. Past performance is no guarantee of future results. Please find definitions in the disclaimer.
Mexican peso - sombreros off: The Mexican peso rallied 2.4% against a falling US dollar over the past five trading days, reaching the highest level in more than one year. President Donald Trump’s continuous challenges over a potential Russian involvement in the last US election are raising questions about his ability to deliver change, especially related to his plans to lift trade barriers with neighbouring countries such as Mexico. The Mexican currency has also been boosted by improving data: inflation rose slightly less than expected in June, while Industrial Production increased by 1.0% in May from a year earlier.
ON THE SLIDE
Inflation – not even Yellen knows: Despite the global sovereign bond sell-off, based on expectations of higher growth and inflation ahead, consumer prices remain low. Following an inflation increase in the US, Europe and Japan towards the end of last year, price growth has faded or stayed flat in the world’s most advanced economies. Apart from a drop in oil prices, inflation is still hindered by limited wage increases and low productivity growth. This explains why market expectations of US future rate hikes widely diverge from the Fed’s own projections. The central bank expects interest rates to be at 3% by the end of 2019, way above a market forecast of 2%. Fed chair Yellen, who had dismissed previous weak inflation numbers as temporary, told Congress on Wednesday that there is uncertainty about when and how much inflation will respond to tighter policy. US Treasury yields fell after her comments.
Consumer prices (%): The dog that still doesn’t bark
Source: Bloomberg as of 12 July 2017.Please find definitions in the disclaimer.
Japan’s growth and inflation – no cherry blossom: Japan’s government bond yields fell after yet another effort from the country’s central bank to cap them in order to foster growth. The Bank of Japan, which has been trying to kick start the economy for two decades, said last week that it would buy an unlimited amount of 10-year bonds after yields had spiked on the back of an improved economic outlook and a global sovereign sell-off. The country’s Tankan survey, a key measure of economic sentiment, rose to 17 in the second quarter, above expectations and also an improvement from the 12 registered three months earlier. Japan’s Consumer Price Index, however, remained at a stark 0.0% in June.
Source for all data: Bloomberg and Barclays Capital as of 12 July 2017, unless indicated.