Some respite for French bonds

There was some further modest relief for French government bonds yesterday as yields edged down for a second session running and spreads over Germany narrowed slightly, though whether they are now ‘out of the woods’ remains to be seen. The euro has also steadied somewhat, trading at about $1.1225 against the dollar this morning (off lows of around $1.1160 early yesterday morning) and at just under £0.85 against sterling. The pound is little changed against the US currency as it continue to hold above the $1.32 level.

French 10-year bond yields have edged down by around 10bps since closing at a multi-year high not far shy of 5% last Thursday, while spreads over equivalent German bond yields have come in a little over the past few days.  German yields nudged higher yesterday, as did US yields, though yields generally are drifting lower this morning. In equity markets, the Stoxx Europe 600 halted a four-day slide, closing with gains of just under 0.5%, while the S&P 500 ended higher for a third consecutive session, adding a further 0.7% by the close of business.

In remarks yesterday, ECB Chief Economist Philip Lane said “the (recent) increase in long-term interest rates constitutes a material tightening of financial conditions for the euro area,” adding that “according to ECB models, an increase in long-term interest rates has a material adverse impact on (economic) activity levels and lowers inflation over the medium term.” His comments reinforce the view that the ECB will keep the deposit rate unchanged at 2.5% when it meets again at the end of this month.

In the US, the ISM services index for September was broadly in line with the consensus forecast at 54.9. This was down slightly from August but still consistent with solid growth in this sector of the economy, led by robust expansion in new orders. Not surprisingly though, higher energy prices are contributing to a fairly rapid increase in input costs facing firms.

For the day ahead, economic data due include retail sales (August) in the Euro area; the construction PMI (September) in the UK; and the ADP weekly employment and trade balance (August) in the US. There are also a number of Fed members due on the wires over the course of the day.