After the substantial moves on Tuesday markets had a calmer tone yesterday. The situation in Ukraine is tried to be solved with negotiations, which would leave space for the markets to look for new drivers.
Stock markets were mixed with small moves. Also the US and German debt prices were rather flat. German Bund yield stayed unchanged at 1.6%, whereas the US 10-year Treasury yield edged up by 1bp to 2.7%.
Euro area periphery bonds saw some gains however. Spanish and Italian 10-year yields were pushed to 8-year lows. Also Portuguese and Greek bond yield came down. In addition to the calming situation in Ukraine and the positive sentiment from the PMI’s, the expectations for easy monetary policy provided support for the bonds.
Markets are hoping for dovish message from the ECB. If the central bank does nothing, the rates are bound to go up today.
Weather brings weak numbers
US private sector employment ADP and non-manufacturing ISM were softer than expected. It is however widely accepted that the weather pushed down the activity in the US in the beginning of the year, so the figures on the weak side should not come as a big surprise to the markets. We expect the official payrolls report as well to come out below expectations tomorrow.
The weather explanation was confirmed in Fed’s Beige Book, that said that severe weather took a toll on shopping and consumer spending recent weeks, leading to slower economic growth or outright contraction in some areas of the country.
Weather related weak numbers are not yet enough to push Fed to change its course and Yellen is likely to push the tapering to continue as previously guided. Thus, once it gets sunnier again in the US economy, the long US rates have more upside potential.
Not again, ECB
ECB’s Draghi has given two reasons for the central bank to provide new easing measures: an unwarranted tightening of money market conditions or the deterioration in the inflation outlook.
Bank overnight lending rates have somewhat stabilized even though the excess liquidity in the system has come down to around 130bn euros. In addition inflation surprised to the upside in February.
However, the market expectations are for a quite dovish central bank. Reuters reported earlier this week ECB sources predicting that there would be unanimous agreement to end sterilization of SMP-bond purchases. Draghi in turn gave a speech saying about inflation that “the longer it stays at the current level, the higher will be the risk that it will not go back to 2 percent in any reasonable time”.
Expectations for additional easing have thus clearly increased, again. If the ECB does nothing, the disappointment will push up rates today.
Commission gives homework to Italy
The European Commission said that e.g. Belgium, Germany, Ireland, Spain, France, Italy, the Netherlands, Finland, Sweden, and the United Kingdom all had imbalances in their economies.
Italy is on a watch list due to the country’s very high public debt and weak external competitiveness whereas Commission considers that in Spain imbalances are no longer excessive. New Italian prime minister Renzi has ambitious plans to turn the country’s direction. Even though markets are not now pushing for changes with Italian 10-year yield at 3.4%, the situation can turn quickly.
Luckily Euro area has its exports
There were no revisions to the Q4 Euro area GDP growth of 0.3 % from the previous quarter. Finland and Denmark were two of the four EU countries that saw the GDP shrink from the previous quarter.
In Euro area household consumption continued its sluggish development by growing only slightly 0.1% whereas investments grew by 1.1%. Euro area GDP growth was mostly driven by exports that increased by 1.2% and contributed +0.6pp to the GDP growth. Inventories were a drag this time.
Elsewhere the final Euro area PMI composite output index was revised up to 53.3 from 52.7 supporting the picture that Euro area economy is slowly recovering.
BoE, auctions and some data today
We do not expect Bank of England to change the Bank rate or change the size of the Asset Purchase Programme (QE) today. The March MPC meeting could thus be a non-event. On the data front we have German and US factory orders on the calendar.
Today Spain will issue bonds maturing in 2017, 2019 and 2024, and France is on the market with 8-, 10- and 13-year bonds targeting 7-8bn euros.
Tomorrow Moody’s can revisit its ratings on Belgium and Netherlands and Fitch on ESM.
Nordea