I’M GOIN’ DOWN...
How low can you go? The coming week may tell whether the incessant plunge in global bond yields shows any signs of relenting.
Mind-boggling milestones are being hit almost daily as central bankers beat the global rate-cut drum, and on the news that Christine Lagarde will be the next European Central Bank chief and two super-doves are being lined up to join the U.S. Federal Reserve.
German 10-year bond yields fell below the ECB’s negative 0.40-per-cent deposit rate for the first time, the whole U.S. curve yields less than the Fed’s 2.5-per-cent target rate and Britain’s 10-year gilt yield is below its central bank rate too.
The list goes on ... Belgium’s 10-year yield is sub-zero for the first time, the entire Danish bond curve yields less than zero, Switzerland’s is tantilizingly close to doing the same so it’s no surprise then that the pool of negative-yielding bonds globally is now more than $13-trillion and getting deeper.
Signs of unease are starting to show though - some asset managers are starting to back away from bonds, wary the “euphoria” over U.S. interest rate cuts is overdone and a Fed policymaker this week made a point of saying that markets do sometimes get things wrong.
But with so much priced in now, any failure to deliver on easing could spark a tantrum. A big one.
WILL POWELL DO THE PUT
The event likely to determine whether that tantrum takes hold or not will be Federal Reserve Chairman Jerome Powell’s twice-yearly testimony on the economy to the financial services committee in the House of Representatives on Wednesday.
It starts at 1600 GMT and given the backdrop of record-high U.S. stock markets plus strident calls for interest-rate cuts from President Donald Trump, he will be walking a fine line.
Of late, Trump has been a harsh critic of Powell, whom he appointed in 2018. Trump’s reasoning is that as the euro zone and Japan keep policy rates around zero, the Fed is making the U.S. less competitive globally by pegging the funds rate in a range between 2.25% and 2.5%.
Powell has been able to point to the robust labor market as a reason for treading cautiously on policy easing. But he may have to start paying attention to signs of weakness here -- the average monthly increase in non-farm payrolls was 164,000 between January-May this year, versus 223,000 in 2018.
DON’T BE DISAPPOINTED
China will publish its monthly dump of data next week and after some soggy manufacturing surveys recently it isn’t expected to make particularly uplifting reading.
There will be investment numbers, bank lending figures, retail sales and trade data. The last of those could show an improved surplus simply because of a steeper drop in imports, as suggested by another lead indicator -- South Korea’s exports.
Regulators have already hinted that Chinese banks didn’t lend all that much in June either, but don’t be too disappointed. The fact is money market rates are plumbing new lows having seen authorities re-open the monetary taps to coax local governments into more borrowing and spending.
The Sino-U.S. trade war, meanwhile, rumbles on after another truce with Trump and China’s declaration it needs tariffs removed as a precondition to a deal.
Most investors are circumspect on where the talks go from here but the data deluge will them an give an up-to-date reading of the impact of tensions so far.
EUROPEAN EARNINGS
Europe’s corporate earnings season is just around the corner and having seen profits shrink in the first quarter, the hope is Q2 will have brought a return to growth.
That contrasts with the United States where analysts expect earnings to have stagnated, partly due to Trump’s trade war with China and some other parts of the world squeezing margins.
Indeed for the next year, Europe’s earnings growth is predicted to outpace the United States according to Refinitiv I/B/E/S. Some also see U.S. equities as especially vulnerable to a pullback after a turbo-charged first-half lifted Wall Street back to record highs.
Recent data showed heavyweight funds yanked some $13.8 billion out U.S. stocks over the past week. Europe’s economy has also begun surprising to the upside whereas the U.S. economy has underwhelmed. The gap between euro zone and U.S. economic surprises on Citi’s widely-watched index is the widest it’s been in two years.
BIT OF A POUNDING
Traders are looking for signs whether Britain’s dismal PMI releases are filtering through to weaker economic growth. If confirmed, this could reinforce investors’ expectations of interest rate cuts later this year and a weaker pound.
Next Wednesday’s GDP report for May is expected show a slowdown to 0.1 per cent from 0.3 per cent on a quarterly basis. Month-on-month, however, growth is expected to have picked up to 0.3 per cent versus a 0.4-per-cent fall in April.
June manufacturing PMI has sunk to a six-year low, data has already showed. That was followed by the worst construction PMI since April 2009, when Britain was in the throes of the global financial crisis.
The dismal indicators, alongside a surprisingly dovish speech by Bank of England governor Mark Carney, have led money markets to fully price in a 25 basis points cut in the next 12 months. The upcoming data could confirm how bad things are - the UK will also release retail sales and housing data.
While growth is weakening across the world, prompting major central banks to ease their monetary policies, Britain has another major headache – Brexit.
Three years after voting to quit the European Union, it remains unclear whether the UK can secure a transition deal by the Oct. 31 Brexit deadline, or whether uncertainty, which has dragged on the economy, will be further prolonged.