Bond bears are marching on, but orderly

Bond Market Movers – Review and Outlook

What drove the bond markets last week?

• Upward pressure on energy commodity prices initially continued, after a major Saudi oil pipeline had to be shut down for repairs and the Houthi rebels took control of the Bab al-Mandab Strait. Later, the oil market has moved to a consolidation mode for now.
• The Fed has decided to raise its benchmark interest rate for the first time since July 2023. The updated "dot plot" indicates one more rate hike by the end of 2026 and stable key rates in the coming year.
• U.S. inflation remained steady at 3.4% in August. The core rate did decline slightly, but the price increase compared to the previous month was larger than expected.
• U.S. retail sales returned to a growth trajectory with unexpected strength in August, driven by broad-based gains.
• The ZEW Economic Sentiment Index appears unfazed by the recent escalation of tensions in the Middle East. The assessment of the economic situation has actually improved notably.
• As expected, the Bank of Japan raised its key interest rate for the second time this year. The Bank of England, on the other hand, is still keeping its feet still.

What could drive the market next week?

• The financial markets are set to remain focused on news from the Middle East and trends in commodity prices. When will the door open for a diplomatic rapprochement?
• The S&P Global Purchasing Managers' Indices for the Eurozone and the ifo Business Climate Index are the macroeconomic highlights of the coming week. Overall, we expect sentiment to continue to improve, albeit to a moderate extent.
• Following the state elections in Berlin and Mecklenburg-Western Pomerania, attention is now focused on whether the German federal government, composed of the CDU/CSU and the SPD, will remain stable.
• U.S. President Trump is hosting Chinese President Xi on a state visit. Key issues are likely to include an extension of the trade truce and U.S. sanctions against Iran.
• In the primary market for U.S. Treasury securities, short- to mediumterm maturities will be in the spotlight next week. Meanwhile, supply pressure in the primary market for euro-denominated government bonds is likely to ease significantly compared with last week. We expect gross issuance to total only about 12 billion euros, down from 30 billion euros the previous week. Net cash flows are set to remain well in positive territory due to high reflows from maturing obligations.

Elmar Völker, Senior Fixed Income Analyst