German bond yields edged slightly higher yesterday, but trading volumes were expectedly very subdued due to the US holiday. Italian (and Spanish) bonds continued to rally in the hope that a new government could make progress in reforming the Italian economy (see more below). The Italian 10-year benchmark yield fell to its lowest level since 2006.
Trading volumes will pick up today, and yields are set to remain under some upward pressure.
European equities mostly saw some gains. Asian markets are trading somewhat mixed this morning, with Chinese equities down, while Japan is trading with clear gains in the aftermath of new measures from the Bank of Japan (see more below).
Renzi with ambitious goals – reality likely to be different
After receiving the mandate to form a new government, Matteo Renzi set an ambitious timetable for the upcoming government. He intends to move on the new electoral law and institutional changes by the end of this month, labour market measures in March, simplifying the public administration in April and making changes to the tax system in May.
The timetable Mr Renzi has set would be hard to meet even with a strong majority, while Mr Renzi will have to live up with a coalition government. His plan seems to be to lead the upcoming government until 2018, but a fresh mandate may be needed to be able to implement bigger reforms, something Italy really needs. As a result then, the possibility of new elections, after the electoral reform has been finished, certainly cannot be excluded and this time it could actually be helpful in a longer-run perspective.
BoJ has more ammunition left – monetary policy alone cannot lift Japan
The Bank of Japan kept its asset purchase programme unchanged, but doubled the scale of two of its lending facilities and extended their durations by one year. More specifically, the facilities extended were the fund-provisioning measure to stimulate bank lending, where financial institutions are able to borrow funds from the BoJ up to twice their net increase in lending, and the fund-provisioning measure to support strengthening the foundations for economic growth.
The new steps taken were not particularly large, but they illustrate that BoJ is prepared to do more. More specifically, it will feel more pressure to come up with more easing measures, as the sales tax hike from 5% to 8% due in April is likely to hit consumption. Easier monetary policy alone will not cure the ills of the Japanese economy, and unfortunately, bigger structural reforms have still not seen daylight.
Bundesbank confirms the rumours – SMP sterilizations to end soon?
The German Bundesbank commented in its monthly report that the liquidity absorbing sterilizations related to the discontinued Securities Markets Programme contributed to the volatility in money market conditions. It added it was open to potential adjustment of the operations, if it suited to stabilize money market and liquidity conditions and thereby signalled more clearly the accommodative policy stance of the ECB. The Bundesbank thus confirmed the earlier rumours on its stance. Ending the sterilizations wholly would add around EUR 175bn of liquidity, and the threshold for the ECB to take such a step should be quite low.
Eyes on confidence data on both sides of the Atlantic
Confidence data releases will gather the main focus today. In the US, the regional manufacturing confidence numbers will be set in motion by the New York Fed manufacturing index at 14:30 CET. The regional indices will receive added attention due to the surprising plunge in the manufacturing ISM index earlier this month. In other US data, the December capital flow numbers will be released at 15:00 CET and the NAHB housing market index at 16:00 CET.
In Europe, the main focus will be on UK January inflation data at 10:30 CET and the German ZEW index at 11:00 CET. In addition, the ECOFIN meeting of EU finance ministers will start at 9:00 CET. The ECB’s Praet will speak at 11:20 CET, Linde at 12:00 CET and Liikanen at16:30 CET.
New 30-year bond from the Netherlands
The Netherlands will launch a new 30-year bond, maturing on 15 January 2047, for a minimum of EUR 3bn via the Dutch Direct Auction today. Initial spread guidance over the German DBR 2.5% July 2044 was set at 19 to 22bp. The books will open at 10:00 CET and close at 17:00 CET at the latest.
German yields creeping higher again
Nordea