Good morning, bond yields dropped somewhat yesterday triggered by weak US retail sales and in the early evening the news that Italian premier Letta is resigning. January retail sales were the weakest for 10 months but end-2013 figures were also revised lower. For now most market participants are still calling it due to bad weather but fact remains that based on January figures alone Q1 GDP figures would be in the 1% territory. US 10-yr yields dropped 4 bps to 2.71% while 2s/10s flattened around 2 bps to 240 bps.
Equities were weighed down partly by the weak US figures but also a batch of weak earnings out of Europe which dragged down European equities as well but during the session, US equities edged higher with the S&P 500 ending the day up 0.58%–that’s 1% below the all-time high reached in the middle of January.
In Europe, Bund yields dropped close to four bps driven by the weak earnings; especially French banking giant BNP Paribas cast a shadow over the markets reporting markedly lower than expected earnings due to revisions set aside to possible US sanctions infringements. Peripheral bonds were not in so big demand but are still trading pretty close to multi-year low spread vs. Germany. Even though the risk-on sentiment has been shaken, investors still like the pick-up they get in peripherals.
iTRAXX Xover widened some eight to 10 bps during the day but was pretty much unchanged at close and are as well close to the multi-year lows.
Nothing happens? Change premier. Italy tries that… again
Italian PM Letta last night threw in the towel and left the premier post in Italy after losing a power struggle in the Democratic Party to newly elected party boss Matteo Renzi. Renzi has made his name as Mayor of Florence and has long sought the post as Prime Minister. On the whole, it is difficult to see any major differences in the policies that Renzi wants to pursue instead of Letta so investors will probably not give up on Italy due to the change. However, Renzi will become Prime Minister even though he is not a member of the Italian parliament and though this does not pose a problem per se, in a country where the divide between politicians and voters is of historical magnitude, this probably will not help bridge that divide. Meanwhile, the dire economic outlook continues.
China bad loans continue to rise
Chinese banks’ bad loans rose to the highest level since 2008. Non-performing loans rose by 28.5bn yuan to 592bn yuan at the end of 2013 according to Bloomberg. It was the ninth straight quarter the bad loans rose.
Forecasters call European inflation lower
ECB released its first quarter survey of professional forecasters yesterday. The 2014 and 2015 inflation forecasts were lowered somewhat for both years compared to the previous report but they are matching the consensus forecasts. The long-term forecast is stable at 1.9%. Growth forecasts were basically unchanged although the long-term growth forecast was marginally higher at 1.8% versus 1.7% in the previous report. Here the difference with the consensus forecast is not negligble at 1.5%.
Taking the temperature on Europe
Today, Eurostat will release preliminary Euro-zone GDP figures for Q4. Preliminary figures from Spain and Italy points towards a growth rate of 0.3% so France and Germany will have to pull their weight but we think they’ll manage. Not least because of consumption brought forward due to the VAT hike in January, we expect a decent increase for France (0.4%), a bit more than for Germany (0.3%). We see risks skewed to the downside given weak, e.g., weak retail number for December but expect a growth of around 0.3% on the quarter.
What to make of it all
As risky assets started the year in a more fragile mood, Bunds went on a tear increasing more than 5 full points. Last week has shown some signs of pushing back. It might be too soon to go short bunds but from my perspective the short-term outlook looks ripe to further test of the downside.
Nordea