Europe:
Germany’s two-year bond yield falls to three-month low
Germany’s two-year government bond yield fell to a three-month low on Thursday, as global political uncertainty and anticipation of increased buying by the European Central Bank before the end of the year continued to boost appetite for debt from Europe’s biggest economy. U.S. Treasury yields fell across the board on Wednesday as risk appetite dwindled after a sell-off in some foreign equity markets and U.S. President Donald Trump’s recognition of Jerusalem as Israel’s capital touched off a storm of protest from world leaders. That set the tone for the start of the European session. In addition, analysts said, front-loading of ECB asset purchases before the end of the year pushed German yields down. The ECB said earlier this week it will not purchase bonds as part of its stimulus package from Dec. 21 to Dec. 29, expecting market liquidity will drop around the Christmas holidays. Germany’s two-year bond yield fell just over a basis point on Thursday in early trade to -0.793 percent, its lowest level since Sept. 8. It inched back to -0.78 percent by midday. Ten-year bond yields came off three-month lows reached the previous session and was a basis point higher at 0.31 percent.
U.S.:
U.S. unit labor costs decline for two straight quarters
U.S. unit labor costs were much weaker than initially thought, declining both in the second and third quarters of this year, pointing to very benign inflation pressures in the near term even as the labor market is close to full employment. Other data on Wednesday showed private-sector employment increasing at a solid clip in November, with the manufacturing sector adding the most jobs in at least 15 years. The signs of soft wage growth and tightening labor market conditions could further intensify inflation debate at the Federal Reserve’s policy meeting next week. Economists, however, believe that wage growth is being understated. “The weakness in unit labor costs will undoubtedly be cited by many as evidence that worries about the economy overheating due to a tightening labor market are misplaced,” said Jim O‘Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York. “But we believe that the official wage income data being used for calculations have been distorted recently by income reporting being delayed in anticipation of tax cuts, and Commerce Department analysts may be misinterpreting information from quarterly tax records.”
Asia:
China’s growth objectives clash with financial stability goal
China should prioritize financial stability above development goals, as pursuit of regional growth targets and helping firms avoid heavy job losses had led to a surge in debt, particularly at local government level, the International Monetary Fund said. Noting a lack of coordination and inadequate systemic risk analysis in a report released on Wednesday, the IMF also recommended the formation of a financial stability sub-committee comprising the central bank and three financial regulatory agencies, and an increase in staff for the banking watchdog. Since the IMF’s last assessment of the Chinese financial sector’s resilience to shocks and contagion in 2011, two concerns remain – credit growth remains high and the expansion of wealth management products (WMPs), said Ratna Sahay, deputy director of the IMF’s Monetary and Capital Markets Department. “Risks are large,” Sahay told reporters during an online briefing. “Having said that, the authorities are really aware of risks and they are working proactively to contain these risks.” The IMF report said that while China has been taking steps to address its debt risks, reining in excessive credit growth will require a de-emphasis on high GDP projections in national plans that have spurred local governments to set high growth targets.
