The turmoil in Ukraine has now – mercifully – moved on to the financial aspects. Yesterday saw a delay in selecting a national unity government (selection will be Thursday instead) which is a prerequisite for EU and IMF financial aid which again is vital for keeping the Ukraine solvent. See an in in depth analysis of the situation here. Though the Ukrainian situation in essence is totally idiosyncratic, the EM noise for 2014 is obviously not helping rates break higher.
Slight decreases in EUR swap rates yesterday, despite yesterday’s German GDP numbers which rose 0.5% QoQ for Q4 2013, see details here. In a broader scope, yesterday’s 0.1% revision up to 1.2% 2014 Euro area GDP growth by the European Commission, still amounts to weak growth and the unemployment rate of 12% is obviously a going concern. The Mar14 Euro Bund Future ticked up to above 144 at one point yesterday, quite close to the 144.1 of early February.
On the US side, roughly the same: 10Y Treasuries yields down 3-4bps which however still is 15bps above the lows to start this month. The housing data was ok to good, but consumer confidence caused Treasuries to perform (see more below).
EUR short rates: Nothing to see here
Our call on the March ECB remains steady as can be: No easing there.
Recent stress in money markets is a lot less now than it was in February where the ECB stood still. Yesterday’s liquidity operations did not add to much volatility. Yesterday’s MRO added 1.2bn and the SMP was fully (175.5bn) absorbed. Short end EONIA swaps stood largely still on this.
Banks seem to self-regulating the liquidity a lot better now than in January, and the urgency for ECB to add liquidity (likely thru ending the SMP-sterilization) or slashing rates (likely the refi to begin with) is small, in our view.
On inflation, next Thursday, the ECB publish staff projections of 2016 inflation for the first time. Our expectation is for 1.6%-1.7%, which is about 40bps above the market pricing in the inflation swap market. If the ECB releases expectations near those levels, the chance of March easing is low, though the prospect of further easing down the road surely remains.
We have recently recommended paying the bottom of the (still) inverted Eonia swap curve, Eonia 3M, 6M forward. 6M3M is up 2bps however as the curve is now less inverted than last week. Still, the 6M3M swap lies about 3bps below the 3M spot swap, so there’s still value there.
US: Reasonably strong housing numbers but poor confidence numbers
Though the increase percentage fell 0.3% to 13.4% and thus decelerated for the first time since June, the S&P/Case-Shiller index of property values in 20 US cities was still perceived as strong. According to Bloomberg, an analyst-survey ranged from 10% to 13.9% so clearly the number printed in the upper echelon and the number caused a correction upwards on US stock index futures.
Consumer confidence- possibly under the influence of the weather – retreated to 78.1 from 80.7 and against 80.0 expected. The weather – no seriously. It has been the guilty party for much so far in 2014, but the fact of the matter is probably that the tapering plan in particular and the US economic resurgence in general need something better fairly fast on the key figure side. This was not it, and we might have to wait until March’s NFP to get wiser.
Lithuanian Banks pushing for ECB supervision
The three largest Lithuanian banks are seemingly pushing to join the ECBs balance sheet assessment well before the Lithuania can expect an EU decision on its Euro-adoption (clarity not expected before mid-year, and any implementation of the Euro in the Baltic state is not before January 1st at the earliest). It’s always good to be a club other wants to join.
Today
Today’s calendar is fairly light, with the highlights being preliminary British YoY GDP numbers for Q4 and US data for mortgage applications.
On the auction front Germany sells 3bn 2046 bonds, Italy is in the market for 8.5bn 6M bills and the US continues the flow from yesterday and sells 2Y FRNs and 5Y notes.
Nordea