Market participants are betting on a prolonged period of rate hikes

Bond Market Movers – Review and Outlook

What drove the bond markets last week?

• In the Middle East conflict, the U.S. and Iran have resumed talks aimed at ending the de facto blockade of the Strait of Hormuz
• However, there are no signs of an imminent breakthrough at this time.
• Economic sentiment in the euro area improved further in September. The S&P Global Composite PMI has risen to its highest level since spring 2023. The ifo Business Climate Index has improved for the fifth consecutive month.
• In the U.S., the purchasing managers' indices published by S&P Global are also showing a surprisingly positive trend. They suggest accelerated economic growth.
• The latest ECB survey on consumer inflation expectations indicates a rise in inflation concerns in both the short and medium term.
• Once again, there is bad news for France from the rating agencies. Scope has lowered the credit rating from AA- to A+.
• The most recent auctions of 5-year and 7-year U.S. Treasury notes have both seen sluggish demand.

What could drive the market next week?

• The financial markets remain focused on news from the Middle East and trends in commodity prices. How reliable are the latest signs pointing toward a diplomatic rapprochement?
• In the euro area, inflation is set to rise in September for the third consecutive month. We also expect the core rate to turn upwards.
• In the U.S., the regional leading indicators for the manufacturing sector collectively point to a slight souring in the ISM Manufacturing Index.
• U.S. job market could send mixed signals for September. While the ADP report is set to show stronger job growth than in August, we anticipate that the official labor market report will point to a slowdown in employment growth.
• In the primary market for U.S. Treasury securities will be quiet next week. Meanwhile, supply pressure in the primary market for EUR government bonds is likely to mount strongly compared with last week. We expect gross supply of approximately 45 billion EUR, up from 20 billion EUR the previous week. Particular attention is being paid to the next auction of long-term French OATs in light of a recent severe turbulence in the French government bond market. Meanwhile, net cash flows are likely to plummet deep into negative territory due to a lack of reflows.

Elmar Völker, Senior Fixed Income Analyst