Euro zone bond yields sink as geopolitics sow inflation doubts
Euro zone government bond yields hit multi-week lows on Tuesday as geopolitical tensions from the Middle East to the United States pointed to slower price growth. A diplomatic rift between Qatar and several Arab states including Saudi Arabia has depressed oil prices as it could undermine efforts by OPEC to tighten the market. Combined with doubts about the U.S. economy and about President Donald Trump’s ambitious spending plans, the oil slide is clouding the outlook for price growth globally. In turn, this weak outlook is keeping demand high for bonds, despite the fact that the European Central Bank on Thursday is expected to take a more benign view of the economy and potentially close the door to further stimulus. “There is a general risk aversion theme going on,” said Mizuho’s head of euro rates strategy, Peter Chatwell. “The evolution of data in the U.S. has also justified the drop in global government bond yields, and is why investors in Europe feel comfortable at these levels.” Britain’s election on Thursday, which a minority of pollsters indicate could result in a hung parliament, is also spreading a cautious tone across markets in general. Europe’s benchmark German Bund yields fell to their lowest level in nearly six weeks at 0.262 percent, while French equivalents fell below 0.70 percent for the first time since early January.
U.S. services, factory data point to moderate economic growth
U.S. services sector activity slowed in May as new orders tumbled, but a jump in employment to a near two-year high pointed to sustained labor market strength despite a deceleration in job growth last month. The moderation in services industries production, together with other data on Monday showing orders for manufactured goods falling in April for the first time in five months and worker productivity unchanged in the first quarter, suggest limited scope for faster economic growth. “The economy is neither accelerating nor slowing, but the labor market is looking up,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. The Institute for Supply Management (ISM) said its non-manufacturing activity index fell six-tenths of a percentage point to a reading of 56.9. A reading above 50 indicates expansion in the sector, which accounts for more than two-thirds of U.S. economic activity. Services industries reported a 5.5 percentage points dive in new orders last month. Prices paid by non-manufacturing industries for materials and services declined after increasing for 13 straight months. But a measure of services sector employment surged 6.4 percentage points to its highest level since July 2015, suggesting labor market strength even as nonfarm payrolls increased 138,000 in May after rising 174,000 in April.
Brazil c.bank says signaled future decision to reduce uncertainty
Growing uncertainty over President Michel Temer’s reform agenda prompted policymakers to signal they were poised to reduce the pace of interest rate cuts in July, the central bank said in the minutes of its last rate-setting meeting released on Tuesday. The bank’s nine-member monetary policy committee, known as Copom, decided last week to lower its benchmark Selic rate by 100 basis points to 10.25 percent. But it added in a statement then that it considered it appropriate to dial down the pace of monetary easing going forward. “(The committee members) highlighted the necessity to offer guidance at this moment and give elements to reduce uncertainty and the scope of possibilities for the future path of monetary policy,” the bank said in the minutes. Policymakers judged it appropriate to give more clarity about their next decision as they saw less certainty regarding progress of Temer’s proposals to cut public spending, such as an overhaul of social security rules. The reform agenda is fundamental to cut inflation in the long term, the minutes said. nThe minutes did not make specific references to the corruption investigation against Temer. He has resisted pressure to resign amid accusations he took bribes from the billionaire owners of the world’s largest meatpacker JBS SA. Temer has denied the allegations.