Bond Rout Persists on Tax Plan, Rates; Euro Gains: Markets Wrap
Europe’s core government bonds extended a selloff, tracking a drop in Treasuries amid optimism over the U.S. economy and President Donald Trump’s tax-cut plan. Stocks edged lower and the dollar drifted as investors began to assess the implications of the much-anticipated tax proposal. Treasury yields reached the highest level in more than two months and German and French debt followed suit as investors raised their expectations for another U.S. rate increase this year, but the higher-earning securities of peripheral countries including Portugal and Greece gained. The dollar took a breather after a surge that had carried it to a six-week high. The euro was set for its first rise in four days as a regional confidence index climbed to a decade-high. European stocks slipped as struggling miners and retailers offset gains for oil and gas companies after WTI crude jumped to a five-month high. The prospects for rate hikes and tax cuts point “to a longer-term bond bear market,” Mint Partners credit analyst Bill Blain wrote in a note to clients. “Its coming,” he said. “The question, as always, is timing.”
U.S. second-quarter economic growth revised higher; jobless claims rise
The U.S. economy grew a bit faster than previously estimated in the second quarter, recording its quickest pace in more than two years, but the momentum probably slowed in the third quarter as Hurricanes Harvey and Irma temporarily curbed activity. Gross domestic product increased at a 3.1 percent annual rate in the April-June period, the Commerce Department said in its third estimate on Thursday. The upward revision from the 3.0 percent rate of growth reported last month reflected a slightly faster pace of inventory investment. Growth last quarter was the quickest since the first quarter of 2015 and followed a 1.2 percent pace in the January-March period. Economists had expected that the second-quarter GDP growth rate would be unrevised at 3.0 percent. Harvey, which struck Texas, has been blamed for much of the decline in retail sales, industrial production, homebuilding and home sales in August. Further weakness is anticipated in September after Irma slammed into Florida early this month.
German bond yields hit 8-week high as Trump tax plan revives reflation bets
German bond yields hit eight-week highs on Thursday, leading a rise in euro zone borrowing costs as U.S. President Donald Trump proposed the biggest U.S. tax overhaul in three decades and strong data boosted the case for another rate hike this year. Trump on Wednesday proposed to lower corporate and small-business income tax rates, reduce the top income tax rate for high-earning American individuals and scrap some popular tax breaks. The plan has revived expectations that his policies will boost the U.S. economy and inflation – an environment that tends to put upward pressure on government bond yields. It also comes in a week where U.S. Federal Reserve chief Janet Yellen confirmed the outlook for further rate rises, while better-than-expected U.S. durable goods orders data suggested inflation may be picking up. “The market had given up on the Trump reflation trade and this is coming back with a bit more detail on tax plans,” said Commerzbank analyst Rainer Guntermann. “At the same time, this gives the Fed more ammunition to hike rates in the coming months.”
China September factory activity seen growing at slightly slower pace
China’s factories likely cranked up activity for the 14th straight month in September as the country’s year-long building boom and higher prices generate hearty profits, though the pace of growth may have eased slightly from August. The official manufacturing Purchasing Managers’ Index (PMI) on Sunday is expected to come in at 51.5 for September, dipping marginally from August’s 51.7, according to a median forecast of 24 economists polled by Reuters. The 50-mark divides expansion from contraction on a monthly basis. China’s manufacturers are reporting robust earnings, fuelled by a government-led infrastructure spending spree, stronger factory-gate prices and a recovery in exports. Profit growth at Chinese industrial firms accelerated in August at the fastest monthly pace in four years due to higher commodity prices, data showed on Wednesday. Steel mills, in particular, continue to run at full tilt to cash in on fat profit margins and build up inventories ahead of expected government curbs on production to reduce choking air pollution over the winter.