Change at Downing Street

Bond Market Movers – Review and Outlook

What drove the bond markets last week?

• Although negotiations on a deal between the U.S. and Iran are still ongoing and no one knows what will happen, the market has already made up its mind. Oil futures have fallen further. Consequently, expectations for inflation and the central banks’ response are being adjusted.
• Where is the Fed headed? Kevin Warsh’s announcements regarding a review of the Fed’s strategy and some changes to its communication continue to be discussed. Less transparency could lead to greater volatility; on the other hand, market prices for assets would be less distorted by the Fed.
• The ECB is likely to stick to its course of cautious tightening for the time being. Recent remarks by President Lagarde and Chief Economist Lane suggest that the ECB expects inflation rates to remain elevated.
• Economic data for Germany was somewhat mixed. At least there are finally clear signs of growth-friendly reforms. However, sentiment remains subdued for now. This does not yet signal a turnaround.
• A change of leadership is on the horizon at Downing Street in the UK. What does this mean for fiscal policy? Surprises are possible.
• Auctions in the government bond market were generally uneventful.

What could drive the market next week?

• Negotiations between Iran and the U.S. remain in the spotlight. Outstanding issues include the fate of enriched uranium, Iran’s frozen foreign assets, and the demand for a transit fee for the Strait of Hormuz.
• Inflation data for the eurozone should underscore that inflation barely eased in June. Monthly labor market data will be released from the U.S.—this year on Thursday instead of Friday due to the holiday.
• Speeches by second-tier officials from the ECB and the Fed are likely to draw attention. Among others, ECB Executive Board member Schnabel will take the floor. For the Fed, speeches by representatives from the Chicago, Richmond, and Minneapolis Federal Reserve Banks are on the calendar.
• The ECB Forum in Sintra rounds out the week. As always, President Lagarde will deliver a keynote address at the Portuguese summer retreat.
• Things are likely to gradually quiet down on the primary market. In the U.S., the 4th of July falls on a Saturday this year. The 250th anniversary of the Declaration of Independence will be celebrated. Friday, July 3, is already a holiday, and the stock markets will remain closed. And the World Cup is still going on, too.

Elmar Völker, Senior Fixed Income Analyst