Economic activity indicators in the Euro-area has largely remained encouraging, in particular retail sales, exports, and economic sentiment while the most recent US economic indicators suggest that the US economy is regaining momentum as Q3 approaches. This is reflected in better than expected retail sales for May, a very encouraging labour market report for May, stunningly strong vehicle sales for May and a pick-up in wage inflation.
Global bond markets have adjusted sharply in response to the recent economic data (see charts attached) and to the realisation that inflation is likely to move noticeably higher over the coming months (see our most recent interest rate meeting discussion). Much of the adjustment in the bond markets has come at the long end of the yield curve, driving a substantial steepening of the yield curve in recent weeks. This trend is particularly pronounced for Germany, where 2 year bond yields remain negative (-0.2%) even though the 10 year Bund yields rose to 1% on 10 June 2015. The US 10-year bond yield has risen from below 2% throughout most of April to touch 2.5% on 10 June 2015. Similarly, the SA 10-year bond has jumped from a low of 6.8% in late January 2015 to 8.38% on 10 June 2015.
Some of the rise in bond yields is clearly related to some correction in inflation expectations and shifting perceptions on the timing of central bank lift-off. For example the Euro Area 5y5y inflation swaps are close to 1.8%, up from 1.6% in early April. It is also interesting to see that Euribor futures now price in the first ECB rate hike near the end of 2017. This is a full year earlier than they did in early April. In addition the US markets have increased their probability of a September rate hike by the Federal Reserve, encouraged by signs of a pickup in wage pressure.
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