Kevin Warsh keeps the markets guessing

Bond Market Movers – Review and Outlook

What drove the bond markets last week?

• The news situation in the Middle East oscillates between hope for a new diplomatic initiative to defuse the U.S.-Iran conflict and disappointment over the latest round of reciprocal military strikes. Traffic in the Strait of Hormuz has so far remained very light.
• The Fed left its target range for the overnight rate unchanged at 3.50% to 3.75%. Meanwhile, three regional central bank presidents called for a 25-basis-point hike in the key rate.
• The Bank of England and the Bank of Japan also played the waiting game. At the BoE, the number of dissenting votes in favor of an interest rate hike rose compared to June.
• The ifo Business Climate improved in July for the third consecutive month, as expectations climbed significantly.
• U.S. GDP grew at a slightly slower pace in the second quarter than in the first quarter at 1.5% (annualized). The eurozone economy returned to a growth trajectory, and more strongly so than expected, with expansion of +0.4% (Q/Q).
• Inflation in Germany picked up again in July due to the omission of a gasoline tax rebate. The core rate, on the other hand, retreated.
• Investor demand once again fell short of the planned issuance volume at the most recent auction of 10-year Bunds.

What could drive the market next week?

• The financial markets are set to remain focused on developments in the Middle East and trends in commodity prices. Between a renewed escalation and a diplomatic rapprochement, anything seems possible.
• The U.S. jobs report for July will be the highlight of the macroeconomic data calendar. The sentiment indicators available to date point to robust job growth.
• Regional leading indicators for the U.S. economy also suggest that the ISM indices for both the manufacturing and services sectors rose in July.
• The primary market for U.S. Treasuries will be in the doldrums next week. The focus is on the U.S. Treasury's quarterly refunding statement, specifically on whether it hints at any medium-term adjustments to the issuance volume. Meanwhile, activity in the primary market for euro-denominated government bonds is likely to remain roughly unchanged from the previous week. We expect gross supply to total
• approximately EUR 25 bn. Net cash flows are set to slip into modestly negative territory.

Elmar Völker, Senior Fixed Income Analyst