European yields are up on the day, with Gilts underperforming. Core yields are moving up from recent lows and the flattening of the yield curve from the long end that was triggered by the shortfall of the BoE’s long dated reverse Gilt auction which was halted, with the curve steepening Friday across the board. Steeping is when the short end of the curve outperforms the long end of the interest rate curve. European stock markets are narrowly mixed, with the FTSE 100 outperforming in tandem with Eurozone peripherals. Eurozone spreads are mixed, as stronger than expected German GDP numbers underpin recover hopes on the one hand, but also undermine the case for further ECB easing in September.

UK Construction Data Dropped in June

UK construction data showed a 2.2% year over year drop in June, in the run-in to the referendum on EU membership. This followed a 1.6% year over year decline in May. The June month over month comparison fell 0.9%, with all sub-sectors including residential, commercial, and civil engineering projects which have been showing weakness. The July construction PMI survey, which dove to a seven-year low of 45.9, is pointing to a more acute pace of decline.

German Q2 GDP stronger than expected at 0.4% quarter over quarter. Our median was 0.3% quarter over quarter and consensus 0.2% quarter over quarter and the 0.4% is even above the preliminary overall Eurozone reading and contrasts sharply with the 0.0% quarter over quarter number for France. The German economy continues to outperform and while the quarterly growth rate slowed markedly from 0.7% quarter over quarter in Q1, this was likely also due to the different timing of Easter this year, which distorted both numbers and means the first half of the year has to be seen in conjunction. There is no breakdown with the first release, but the German statistics office said net exports were the main driver of the ongoing recovery. Looking ahead, the third quarter should see consumption picking up again, but the Brexit scenario clearly leaves downside risks for the export oriented German recovery.

Italian economy stagnated in the second quarter of the year, after rising 0.3% quarter over quarter in Q1. Expectations had been for a less pronounced slowdown, but the fall back matches that of France and while the different timing of Easter plays a role in the variations over the Q1/Q2 period, the data highlights that Italian growth remains weak, even if the country managed to move out of recessions.