Bond market rally continues

OVERNIGHT

Asia-Pacific equity market performance is again mixed this morning. The June Australian labour market report was generally stronger than expected, supporting the case for a further interest rate hike. Bank of Japan Governor Ueda has dampened expectations of a tightening in monetary policy next week by saying that convincing evidence that Japan is hitting its inflation target on a sustainable basis is still awaited.

THE DAY AHEAD

Eurozone consumer confidence has climbed for the last three months to reach its highest since February 2022. A number of recent indicators have suggested that Eurozone economic activity is rolling over but, despite that, both ourselves and the consensus forecast a further small rise in confidence in July.

A number of indicators will provide a further gauge on US economic activity. Weekly jobless claim will provide an indication of labour market tightness. The June labour market report suggested that conditions remain buoyant and after a few higher readings the last three weekly claims outturns have surprised on the downside. Meanwhile, the June existing  home sales report will be an update on a sector that has clearly been hurt by rising interest rates but is now showing tentative signs of rolling over. We look for a modest rise. The July Philadelphia Fed index, while a timely update on the factory sector, tends to be too volatile to provide useful indications. There are several UK releases early tomorrow. We expect a small rise of 0.3% in retail sales, which would be the fifth time out of the last six months that sales have gone up. They would still be 1.5% lower than a year ago but early 2023 sales have held up better than was generally expected. However, a big question is whether that will remain the case. Consumer confidence has risen for five months in a row. However, as last month saw both the release of higher-than-expected inflation data and a 50 basis point hike in interest rates, it seems likely that the latest reading for July will show a fall. 

Also out will be public finance data for June. The first two months of the new fiscal year has seen borrowing outturns slightly in excess of the Office for Budget Responsibility’s projections at the time of the March Budget. As that might be at least partly a result of interest rates being higher than forecast, it will be interesting to see if that trend has continued. 

MARKETS

Yesterday’s news of lower-than-expected June UK inflation provided a further boost to the bond market rally. UK gilts yields saw steep declines on the day and US Treasury yields also slipped again. However, German bond yields ended the day modestly up reflecting uncertainties about European Central Bank policy beyond next week’s expected hike. In currency markets, sterling fell sharply against both the euro and the US dollar on the inflation news. Against the euro, it has slid to its lowest level since late May.