Pretty Much Improvement

Today’s Euro-zone PMI data and the ECB lending survey provided fresh evidence the area is making good progress in finally defeating recession. The data is bad news for bonds in the short term, but the still uncertain environment and the risks lurking around the corner mean that any short-term move higher in rates should be seen as a buying opportunity rather than the start of a more permanent uptrend in yields.


Composite PMI now pointing to growth

Today’s flash PMIs for the Euro zone were a clear positive surprise. The composite index jumped from 48.7 to 50.4, the fourth consecutive rise and the first reading above 50 since the January of 2012. Both manufacturing and the services PMIs rose, with the former now at its highest in two years.

Even more encouragingly, the rise in confidence seems to be broad-based. We know that confidence rose in both France and Germany, and can implicitly calculate that notable increases were seen also outside the largest two Euro-zone economies.

The composite PMI is now pointing to a small increase in GDP, implying the Euro-zone economy could soon exit recession. One should not get carried away, though, as the weak credit environment, subdued domestic demand, structural problems in many economies, further austerity measures, political uncertainty and global growth risks will limit the strength of any recovery. In addition, the PMIs have given some false hopes a couple of times before in the past few years. In any case, the Euro-zone outlook has improved considerably in the past months.


Ray of light in the ECB’s lending survey

The ECB’s lending survey also offered more hope of an approaching recovery for the Euro zone economy, even though it continued to identify plenty of weak spots as well. The survey further strengthened the notion that weak demand is increasingly the problem, instead of tight supply of credit, although country-by-country differences remain large.

On the supply side, the net percentage of banks reporting a further tightening of credit standards on loans to non-financial corporations was unchanged in Q2 compared to Q1, the degree of net tightening decreased on both housing loans and for consumer credit. For the latter, standards were actually eased for the first time since end-2007.

On the demand side, the net percentage of banks reporting weaker demand for loans to non-financial companies decreased only moderately and the situation remained gloomy, but the picture for both housing loans and consumer credit improved clearly.

Finally, banks reported a further improvement in access to retail and wholesale funding, the impact of the sovereign debt crisis on banks’ access to credit continued to abate, while regulatory changes continued to contribute to banks scaling down assets and to tighten credit standards.

All in all then, the picture for households is starting to look better, as far as the credit environment is concerned, while companies, most likely foremost small and medium-sized ones, continue to face a grimmer picture. Calls for a coordinated programme to boost lending to small and medium-sized enterprises will thus continue, and such a programme will probably see daylight, even if it does not happen yet during the summer.


Upward pressure on core yields in the very short term

Whereas the big move higher seen in long yields since early May was mainly driven by US events, today’s data add to evidence that upward pressure is starting to stem from Euro-zone sources as well. The improving picture is likely to drive German yields higher during the next few days, but we are unlikely to be at the start of a more permanent uptrend yet. Any move higher towards the recent high of 1.86% in the German 10-year yield should thus be seen as a buying opportunity.

The latest numbers are unlikely to be enough to change the ECB’s stance yet, even though they most likely will be enough to convince the ECB to stand pat at its meeting next week. A dovish stance should continue, as higher rates are not in the interest of the central bank at this point.

That said, events outside the Euro-zone will continue to be a big driver of EUR yields as well, and on that front, the picture is mixed. China’s numbers earlier today illustrate a further loss of momentum. In the US, on the other hand, the Fed is laying the ground for starting to scale back its bond purchases (the Fed has a meeting next week, concluding on 31 July), but even considering that the recent sell-off seems to have taken place too fast.  

The market environment continues to be plagued by many sources of uncertainty, which on thin summer markets can lead to big changes. Despite the gradually improving Euro-zone outlook and likely short-term pressure, bonds are not down and out yet.


Euro-zone GDP to grow soon? 

EUR PMI vs GDP 2013-0724











Improvement in composite PMIs on a broad front 
Euro zone composite PMIs 2013-0724













Banks reporting some positive development on the credit side as well  Lending survey 2013-0724













German 10-year yield to rise further in the coming days German 10Y yield 2013-0724

Latest research

IDR: IDR: Jokowi win paves way for strengthening

The official election result is out and Indonesia has got a new president, the popular Jokowi. This is already priced in the market so IDR will be range-bound for now. It would be IDR positive in a longer perspective, if he succeeds in promoting growth and improving standards of living.

Euro area: PMIs offer hope amidst gloomy headlines

The flash PMIs for July point to a continued recovery in the Euro-area economy. Positive development in sentiment indicators is certainly welcome at a time, when the effect of e.g. the Ukrainian/Russian crisis is weighing on the economy. It is worth remembering that the numbers are unlikely to capture the recent escalation in geopolitical tensions, but the latest weakening of the euro and the ECB’s June easing package, on the other hand, are supportive of the Euro-area economy.

Sweden: Same old story in unemployment

Unemployment bounced back somewhat in June after the stronger than expected reading in May. Seen over the last two years, it is very hard to spot any clear trend downward in unemployment, despite the clear trend upward in employment. Today’s number did not change this overall picture and the expected, future decrease in unemployment seems to continue to be very gradual.

Swedish Morning Briefing - Thursday July 24

South Korea presents stimulus package Reserve Bank of New Zealand lifts policy rate

China: Good PMI no guarantee for growth outperformance

The Chinese economy is currently in a cyclical upturn. But the long-term perspective has not changed. The economy will continue to readjust to the new normal, meaning that a significant pick-up of growth is unlikely.

FI Eye-Opener: Reaching for the stars

German bonds take back earlier losses – yields to creep higher today. S&P 500 just manages to rise to new highs. China’s economy picks up steam. Bank of England not unanimous for too much longer? Russian sanctions on the agenda again. Euro-zone PMIs set to rebound.

Euro Rates Update

The latest Euro Rates Update is now available

BoE minutes: First hike getting closer, but not around the corner yet

BoE minutes showed a unanimous monetary policy decision at the July meeting, but the differing views about the outlook are starting to emerge. The modest wage pressures mean that the Bank is not in any hurry to start to raise rates, and the first rate hike is not around the corner. The August monetary policy meeting and the inflation report will be interesting.

Swedish Morning Briefing - Wednesday 23 July

EU to limit Russian access to capital markets Minutes of BoE meeting due at 10.30

FI Eye-Opener: Some easing in Euro-zone deflation threat

German yields rebound – US Treasuries end with a small rally. Core bond to remain supported today. Equities with clear gains. EU continues to advance with small steps with Russian sanctions. US inflation pressures remain limited for now. At least some easing in the Euro-zone deflation threat. New 30-year benchmark from the EFSF. BoE minutes and French business confidence ahead.

US: Core consumer prices rise less than expected

The overall trend of inflation remained subdued in June

Morning Briefing - Tuesday July 22

Japanese government cuts GDP forecast Pro-Russian separatists hand over black boxes to Malaysia

FI Eye-Opener: Searching for inflation

Core bond yields edge further down – geopolitical tensions continue to support bonds. Equity markets feeling pressure. More sanctions on Russia in the pipeline. US inflation pressures finally picking up? Belgium to sell longer bonds.

Morning Briefing - Monday July 21

Growing pressure for further sanctions against Russia Israel steps up ground offensive in Gaza

While you were busy...

If you are just back from holiday, here are a few bullets on what happened while you were busy…

FI Eye-Opener: Markets too upbeat on Europe?

Bond yields end a bit higher, but near-term upside still limited. US equities with a clear rebound – resistance in sight. Money market rates rise on higher LTRO repayments. More warnings on markets being too optimistic. US inflation numbers and Euro-zone PMIs ahead. Supply action easing – more coupon and redemption payments ahead.

FX: the EUR trap

Is Europe next Japan? Hopefully not. ECB and releveraging implications for EUR.

Week Ahead: 19 - 25 July 2014

US CPI inflation will be out on Tuesday . China and the Euro-zone will present PMI figures. On Friday the German Ifo indexes is released. The BoE will deliver minutes from the July meeting and UK GDP figures will be out on Friday

Swedish Morning Briefing - Friday 18 July

Passenger plane downed over eastern Ukraine Israel launches ground offensive in Gaza

FI Eye-Opener: Increasing tensions to push German yields to new lows

Bonds continue to rally – yields in several semi-core countries hit record lows. Equities suffer a beating. Chinese home prices continue to fall. Geopolitical concerns take centre stage ahead of the weekend. German 10-year yield about to fall to new lows. Mixed US data – Bullard sees early rate hikes. No ABS purchases from the ECB for a long while. US consumer confidence and euro debate ahead.