Jackson Hole will be a litmus test for the Fed Chair

Bond Market Movers – Review and Outlook

What drove the bond markets last week?

• Iran by presenting a new list of demands has dealt a significant blow to hopes for a swift reopening of the Strait of Hormuz. Donald Trump's claim that the U.S. controls the strait is not reflected in the recorded ship movements. Hopes for the imminent reopening of the Strait of Hormuz have gained fresh momentum.
• The U.S. jobs report for July fell far short of expectations. Employment declined for the first time since February, while wage growth slowed markedly.
• U.S. inflation eased in July for the second consecutive month, coming in exactly in line with analysts' consensus expectations. The core rate fell to 2.5%, the lowest level since February. At the producer level, price pressure also continued to ease. ADP report for July was disappointing, showing job growth of just 44,000 in the U.S. private sector, the lowest figure since January.
• The issuance of a new 10-year U.S. Treasury note met with slightly above-average investor demand. The issuance yield marked the highest level since August 2007. grew more strongly than expected in the second quarter, while unit labor costs rose less than anticipated.

What could drive the market next week?

• The financial markets are set to remain focused on developments in the Middle East and commodity price trends. Given the often conflicting signals, everything still seems to be up in the air.
• The Fed will release the minutes of its July 28 to 29 rate-setting meeting.
• The Fed's annual symposium, which takes place in Jackson Hole on the last weekend of August, may already cast its shadow. Will Federal Reserve Chairman Warsh provide more insight into his thinking or his plans to combat inflation than he did during the most recent interest rate decision?
• Key leading economic indicators from the eurozone for August are the highlights on the macroeconomic data calendar. We expect sentiment to continue to improve moderately in each case. The ECB is releasing the latest survey on consumer-inflation expectations as well as the negotiated wages indicator for the second quarter.
• In the primary market for U.S. Treasury securities, the focus next week will be on the issuance of a new 20-year T-bond. Meanwhile, activity in the primary market for euro-denominated government bonds likely remains well below average. We expect gross supply of between 12 and 15 billion euros, compared with 9 billion euros the previous week. Net cash flows are set to surge well into positive territory due to high reflows from maturities.

Elmar Völker, Senior Fixed Income Analyst