Following news this morning that the Hungarian central bank may hike rates before tapering asset purchases depending on June’s inflation report, yields in the European area are rising. It strengthens our belief that we will most likely see Bund yields soaring rather than dropping as central banks are preparing to tighten the economy, and CPI numbers might surprise on Wednesday.
The yearly CPI figures for the Eurozone aggregate are expected to come out at 1.6%, well below the ECB target. If they come out considerably higher and above 2%, they might renew a selloff within government bonds in the Eurozone and across the Atlantic.
The market is starting to fear that the ECB, too, might consider tapering the ECB's PEPP scheme on June the 10th meeting. We believe that this is not likely to happen for the simple reason that the central bank will be reluctant to tighten financial conditions in the euro area. Also, if the ECB were doing so, it would harm countries from the periphery, which are also the ones most hit by the pandemic. Italian BTPS has been one of the largest beneficiaries of the PEPP program. If this support were to lack, Italian yields would move higher quite fast. In light of the selloff in Italian sovereigns this morning, we believe it will be more likely for the ECB to expand the PEPP rather than reducing it. Right now, 10-year BTPS are offering a higher yield than Greece, which debt is rated junk and held mainly by foreign investors. Therefore, we remain positive Italian government bonds as the higher their yield is, the better source of return they are compared to peers. One of the themes recurrent for private investors is where to park money as banks are starting to enforce negative interest rates on clients deposits. When looking at short term European sovereigns, Italian BTPS are the only sovereigns able to offer a positive yield starting from four years of maturity.
Economic Calendar
Monday, May the 16th
- China: NBS Press conference, Industrial Production, Retail Sales
- Italy: Consumer Price Index
- United States: NY Empire State Manufacturing Index, Fed’s Clarida Speech, 3- and 6-month Bill Auction
- United Kingdom: BoE’s Vlieghe Speech, BOE’s Haldane Speech
Tuesday, may the 17th
- Japan: Gross Domestic Product, RBA Meeting Minutes
- United Kingdom: Claimant Count Rate, Claimant Count Change, ILO Unemployment Rate, Average Earnings Including Bonus
- Eurozone: EcoFin Meeting, Gross Domestic Product, ECB’s President Lagarde Speech
- United States: Building Permits, Housing Starts Change
Wednesday, May the 18th
- Australia: Westpac Leading Index, Westpac Consumer Confidence, Wage Price Index
- Japan Industrial Production
- United Kingdom: Consumer Price Index, Retail Price Index, PPI Core Output, Consumer Price Index, Retail Price Index
- Eurozone: ECB’s Panetta Speech, EU Financial Stability Review, Consumer Price Index, ECB’s Lane Speech
- Germany: 10-year Bond Auction
- Canada:BoC Consumer Price Index
- United States: FOMC Minutes, 20-year Bond Auction
Thursday, May the 20th
- Japan: Adjusted Merchandise Trade Balance
- Australia: Consumer Inflation Expectations, Employment Change, Unemployment Rate
- China: PBoC Interest Rate Decision
- Germany: Producer Price Index
- Eurozone: ECB’s Lane Speech,Construction Output, ECB’s President Lagarde speech
- Spain: 3-, 5- and 10-year Bond Auction
- United States: Philadelphia Fed Manufacturing Survey, Initial Jobless Claims
Friday, May the 21st
- Australia: Commonwealth Bank Services PMI, Retail Sales
- United Kingdom: GfK Consumer Confidence, Retail Sales, Markit Manufacturing PMI, Markit Services PMI
- Japan: National CPI
- Eurozone: Eurogroup Meeting, Markit Manufacturing PMI, Markit Services PMI, Markit PMI Composite, Consumer Confidence
- France: Markit Manufacturing PMI, Markit Services PMI, Markit PMI Composite
- Germany: Markit Manufacturing PMI, Markit Services PMI, Markit PMI Composite
- United States: Markit Manufacturing PMI, Markit Services PMI, Markit PMI Composite