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

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