• Bond markets sold off sharply this week on remarks from monetary policymakers. Bond yields rose by 20 to 25 basis points in Germany and the UK, respectively. Yields on Treasuries also rose, but markedly less as U.S. data has underwhelmed.
  • Momentum in personal spending dissipated slightly from the strong performance in the previous two months. Gains in real income surprised to the upside, and should underpin spending going forward.
  • We look forward to next week’s employment report as a potential market mover. We expect a relatively robust print of 170 thousand jobs and unemployment to hold steady at 4.3%.


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Hawkish Central Bank Rhetoric Rattles Markets

Global markets were volatile in recent days. Bond markets sold off sharply since mid-week on remarks from monetary policymakers. Central bankers in the Eurozone and the UK have indicated that meaningful economic improvements should begin to warrant the removal of accommodative monetary policy measures. This hawkish sentiment saw bond yields rise by 20 to 25 basis points in Germany and the UK, respectively. Yields on Treasuries also rose, but markedly less as U.S. data has underwhelmed. The relatively softer U.S. data also led the dollar lower vis-à-vis the euro and the pound.

The lower U.S. dollar also helped to shore up oil prices that have been led higher recently by curtailed production related to maintenance of Alaskan sites and a storm in the Gulf of Mexico. Still, US stockpiles have remained high this summer, with oil prices likely to remain relatively anchored during the rest of the year.

Expectations of less-stimulative policy going forward have also led stock markets to retrench as investors across the Atlantic readied themselves for what may be end an era of cheap money. At the same time, comments by Fed Chair Janet Yellen on Tuesday indicated that the Fed is keeping a close eye on stock markets valuations, injecting further caution into U.S. equity markets. 

Still, the U.S. data came in relatively weak this week. While still supportive of growth in the second quarter, momentum in personal spending dissipated slightly from the strong performance in the previous two months. Gains in real income surprised to the upside, and should underpin spending going forward (Chart 1). But, this was partly related to the weakness in prices, which under-performed in May, corroborating anemic CPI growth on the month (Chart 2). There was also weakness in durable goods orders, which fell in May according to the advance estimate, suggesting weaker capital investment in the second quarter.

But, not all data were soft. Consumer confidence metrics rose according to both the Conference Board and University of Michigan surveys. Moreover, the goods trade balance narrowed slightly in May as automotive exports rebounded following two consecutive months of  underperformance.  With domestic US auto sales peaking last year, global demand will play an increasingly important role for growth in the sector. Exports should also get some support from a weaker greenback. We look forward to next week’s ISM manufacturing survey results to echo these positive developments, with readings poised to expand, mirroring upbeat regional surveys for June.

The string of data that has missed expectations recently has been leading markets to push out the timeline for further rate hikes, with another hike this year now priced in below 50%. This is particularly the case for inflation, which has been stubbornly weak, while wage growth has recently lost some momentum too. We look forward to next week’s employment report as a potential market mover. We expect a relatively robust print of 170 thousand jobs and unemployment to hold steady at 4.3%. Moreover, with unemployment near its natural rate, we expect that wage growth should once again accelerate. This should help underpin the inflation outlook and could bolster the case for another rate hike by year end.

Katherine Judge, Economic Analyst

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