Bonds continued under pressure early yesterday in the aftermath of the Fed, but found demand again later. German yields expectedly ended the day higher, with the 10-year yield up by some 5bp. US yields, in turn, ended the day close to unchanged. Intra-Euro-zone spreads narrowed.
Bonds should see some performance today ahead of the weekend after the recent move higher in yields. After all, tensions between Russia and the EU /US have not disappeared, as new sanctions were introduced yesterday, so risks of another escalation in the crisis remain.
US equities recovered yesterday after the losses from the day before, with S&P 500 up by 0.60%. Overnight, Asian equities have mostly risen, especially in China.
Philly Fed rebounds – jobless claims stay at lower levels
The Philadelphia Fed manufacturing index rebounded from -6.3 to 9.0, roughly taking back the dive seen in February. This leaves the index at around the levels prevailing late last year,
but still much lower than the 20 seen last September.
Initial jobless claims, in turn, printed at 320k, the third number of around that magnitude in a row. Yesterday’s numbers thus suggest that as the drag from bad weather wanes, US data is showing some better readings again.
US banks resilient to another downturn
The latest stress test results, released by the Fed yesterday, show that the largest US banks are collectively better positioned to continue to lend and to meet their financial commitments in an extremely severe economic downturn than they were five years ago. In a scenario of a sharp rise in the unemployment rate, a plunge in equity prices of almost 50%, a fall in house prices to the level of 2011, 29 of the tested 30 US financial institutions would have a Tier 1 common capital ratio of more than 5%. The results illustrate the improved health of the US banking sector and that US banks do not face similar kind of uncertainty that is troubling many European banks at the moment.
Fitch lifts US outlook – Russian ratings under pressure
The ratings agency Fitch removed its AAA rating on the US from negative watch this morning, and awarded a stable outlook. All the three main ratings agencies now have a stable outlook on the US rating, with Moody’s and Fitch still rating the US with the best rating, while S&P considers the US worth a AA+ grade. These scores illustrate improved economic performance as well as clearly diminished risks that another political impasse would lead to uncertainty over the functioning of the federal government.
Russian ratings, in turn, are feeling pressure due to the negative effects caused by the latest crisis. Fitch changed its outlook from stable to negative on its BBB rating earlier today, while Standard & Poor’s did the same yesterday.
All-night meetings not a thing of the past – finally an agreement on the SRM
EU negotiators finally reached an agreement on the Single Resolution Mechanism (SRM) yesterday, after 16 hours of negotiations. The new compromise means the EUR 55bn resolution fund will be built in 8 years instead of 10, the fund will be mutualised by 40% in the first year and it will be enabled to borrow funds. The ECB is mainly responsible for triggering the resolution process, a resolution board will make a suggestion that then needs to be approved by the Commission, while the Council of member states retain a say only if the Commission modifies the original proposal in terms of money needed from the fund or if there was no public interest in resolving the bank.
The agreement is a step towards a more effective and less complex resolution system compared to the previous suggestion, but still leaves the mechanism lacking credibility, especially in terms of the size of the fund and its resources in the build-up face. Such compromises are often what result, when there are too many parties with different interests involved in process, as is often the case in the EU. The agreement still needs to be approved by the Council and the European Parliament.
Fed speeches on the agenda – French local elections on Sunday
Today’s economic data calendar looks rather light, with only Euro-zone March consumer confidence at 16:00 CET of note. The main focus will thus be captured by the message from the EU summit as well as Fed speeches. Bullard will speak at 16:45 CET, Fisher at 18:45 CET, Kocherlakota at 21:30 CET and Stein at 0:20 CET (early Saturday). The ECB, in turn, will release the latest LTRO repayment data at 12:00 CET.
In France, the first round of local elections will take place on Sunday, and the focus will especially be on, how much support the far-right National Front will receive.
Nordea