Bond yields edged lower yesterday, as Draghi’s dovish words had some effect (see more below), though the moves were rather small in core yields. The German 10-year yield, for example, fell by only around a bp. Intra-Euro-zone spreads narrowed. As Draghi’s comments still have some credibility left, they limit the near-term upside potential of German yields, and will keep intra-Euro-zone spreads on a narrowing trend.
US yields saw even smaller changes than German ones. However, a positive payrolls report today could easily push the US 10-year yield out of its trading range for the past month (i.e. above 2.82%). Bearish positions on bonds are thus the way to go today.
European equities ended with small gains yesterday, while in the US, S&P 500 edged lower by 0.11%. Asian equities are trading mixed this morning, while Europe is set open higher.
Limits of verbal easing near for the ECB
The ECB did not offer new stimulus measures yesterday, not a big surprise, but in the press conference, Draghi did all he could to convince that the ECB is prepared to do more, if the need arises. He said we are resolute in our determination to maintain a high degree of monetary accommodation and to act swiftly if required, while the Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation. Yesterday’s decision had been taken by consensus, i.e. it had not been unanimous.
Draghi mentioned the concept of negative deposit rate had also received a good deal of attention, strengthening the view that if the ECB decided to act, a cut in rates (including a negative deposit rate) would likely be a step taken before bond purchases. Regarding bond purchases, Draghi reinforced the view that the ECB would find purchasing simple asset-backed securities more efficient than buying government bonds. It was also interesting, when Draghi said his biggest fear is actually to some extent reality, referring to protracted stagnation.
It was clear Draghi did not want to have a repeat of the market reaction following the March meeting, when e.g. the euro strengthened notably. He had some success in that, though yesterday’s market reaction was rather limited, suggesting the potential to push rates and the euro lower with just words has largely been exhausted. The ability of the ECB to provide more easing with only words is thus quite limited, and real action will be needed for a bigger effect.
Payrolls poison for bonds?
The payrolls Friday is finally here again. After three weaker months of employment gains, today’s payrolls report could easily surprise to the upside. Considering the volatility of the report, even a big deviation from the consensus estimate of some 200k is very possible. Weather effects remain a wild card, since there were some snowstorms also in March. Expectations have been rising ahead of the report, but the risks still remain tilted to the upside. Bonds are thus set to feel more pressure this afternoon. The US employment report will be released at 14:30 CET.
In the Euro zone, the main focus will be on German February factory orders at 8:00 CET and the ECB’s LTRO repayment data at 12:00 CET. The rating agency Moody’s, in turn, has a chance to review its ratings on Greece and Slovakia.
Nordea