Bond markets: Still the bears' turn

Bond Market Movers – Review and Outlook

What drove the bond markets last week?

• The military conflict in the Middle East continues to escalate. Neither the U.S. nor Iran has recently offered any prospects for diplomatic progress in the near future. Rather, the Yemeni Houthi rebels are opening another front by blocking the exit from the Red Sea to Saudi ships.
• As expected, the ECB left its key interest rates unchanged. Central Bank President Lagarde emphasized that the economic outlook is similar to that discussed at the June meeting. They have backed away from what had been a more balanced assessment of inflation at the Sintra symposium.
• The ZEW Economic Sentiment Index improved more than expected in July.
• The U.S. House of Representatives has approved an increase in defense spending of nearly 30% for the coming year.

What could drive the market next week?

• The financial markets remain focused on developments in the Middle East and trends in commodity prices. How long can the Trump administration withstand the pressure from the continued rise in oil prices?
• The Federal Reserve is likely to maintain a wait-and-see approach to monetary policy at its second meeting under Kevin Warsh. Markets’ focus may be on whether there are any dissenting votes in favor of a rate hike.
• The central banks of the United Kingdom and Japan are also not rushing into adjusting their respective monetary policies.
• The macroeconomic data calendar is packed with events during the last week of July. GDP data for the second quarter are set to be released from both the U.S. and the eurozone. We expect moderate growth in each case.
• The ifo Business Climate Index is set to post its third consecutive increase, thanks to a positive reception of the German government's reform plans.
• Another key macroeconomic highlight is the eurozone inflation data for July. The crucial factor will be the extent to which the recent spikes in energy prices have already affected the average price level.
• In the primary market for U.S. Treasury securities, the focus next week will be on short- to medium-term maturities. Meanwhile, activity in the primary market for euro-denominated government bonds is likely to pick up strongly again following its recent slump. We expect gross supply of approximately 25 billion EUR, compared with just 8 billion EUR the previous week. Thanks to reflows of a similar amount, net cash flows are set to hover around zero.

Elmar Völker, Senior Fixed Income Analyst