US data have only started to deteriorate – Nordea Markets

The US surprise index has never been this high at this time of year, but in the wake of somewhat weaker US GDP numbers as well as a weaker-than-expected ISM reading, this has started to unfold (US data usually disappoint over the course of Q2), explains the research team at Nordea Markets.

Key Quotes

“Weaker-than-expected US data would suggest downside risks to yields, as well as continued weaker risk sentiment. However, as long as the Fed is on track for rate hikes, we believe the downside in yields will be limited, and the Fed will need severe disappointments (which we do not foresee) to prevent it from tightening further.”

“This also implies that the scope for a boost to risk sentiment stemming from a drop in yields is also limited. We have indeed been trying to sound the alarm on global risk appetite throughout this year, and stick to that view. Unless data becomes truly awful (wobble factor 1), yields (wobble factor 2) can’t drop much so as to “bail out” risky assets, and if data were to turn out that ugly, it would still be bad news for risk appetite.”

“US core inflation risks remain on the upside in the near term due to, for instance, past dollar weakness and benign base effects in the form of last year’s telecom deflation.”