Bond yields drop amid signs of weaker growth

ISM services survey disappoints

Chart of the Day

The ISM services index, a measure of how fast services activity in the US is expanding, came in much weaker than expected in June. Furthermore, the employment index implied that hiring went into reverse, and the prices paid index implied inflation rose further. The combination of weaker growth and higher inflation seemed to spook markets, and caused US bond yields to decline by the largest in several sessions, taking longer-term yields, such as the 10- and 30-years, to their lowest since much earlier in the year. That seemed to reflect a flight to safety, given equities and most commodities declined.

Macro

An average of the two ISM surveys suggests growth is slowing sharply after a probable strong Q2.

An average of the employment indices fell below 50, which normally means employment is declining. That seems unlikely, but the employment indices are clearly very disappointing given employment is still millions below its pre-Covid level.

An average of the ISM prices paid indices rose in June and points to even higher inflation.

News in the eurozone was more positive - retail rose by 4.6% MoM in May.

Markets

The fall in yields was generally a global story.

Real long-term yields have fallen by much more in the US than the eurozone lately.

The US dollar index has nevertheless risen, which is normally a sign that concerns about the outlook/risk-off sentiment are driving the currency, rather than yield differentials.

Oil was also a casualty, even though some think production will be slower to pick up following disagreements among OPEC members.

The rise in the VVIX could be a sign that equity market volatility is going to pick up - most equity markets fell yesterday.

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