A Rebound in Bond Prices: Just a breather?

Bond Market Movers – Review and Outlook

What drove the bond markets last week?

• The U.S. Treasury Department has announced secondary sanctions against supporters of Iran but has not yet taken any specific measures. Meanwhile, with an eye on the Strait of Hormuz, fresh hope has been emerging that it will reopen.
• Isabel Schnabel, a member of the ECB’s Executive Board perceived to be influential, emphasized the need for further monetary tightening, given that inflation risks are tilted to the upside and the economy remains robust.
• The ifo Business Climate improved much more than expected in August. Overall, the S&P Global Purchasing Managers' Indices for the eurozone showed a moderate improvement in sentiment.
• The ECB's wage indicator showed a slight decline in wage pressure for the second quarter. According to the latest ECB survey, consumer inflation expectations have also declined a bit.

What could drive the market next week?

• The financial markets are set to remain focused on news from the Middle East and trends in commodity prices. Is a reopening of the Strait of Hormuz actually getting closer?
• The gleanings of Kevin Warsh's speech in Jackson Hole could provide significant impetus for inflation expectations and term premiums in the U.S. Treasury market.
• In the eurozone, inflation is set to climb above the 3% mark again in August due to rising energy prices. By contrast, we expect the core rate to move sideways.
• In the U.S., current indicators suggest a slight decline in the ISM Manufacturing Index in August. We also expect sentiment in the service sector to cool modestly.
• The U.S. jobs report for August is likely to show a return to employment growth, though we forecast only modest job creation.
• The primary market for U.S. Treasury bonds is pausing next week. Meanwhile, supply pressure in the primary market for euro-denominated government bonds is likely to increase compared with last week. We expect a gross supply of up to EUR 35 billion, following just over EUR 20 billion the previous week. Net cash flows are set to fall deep into negative territory due to low reflows.

Elmar Völker, Senior Fixed Income Analyst