Shorter German bonds rallied yesterday on the back of soft German inflation numbers (see more below), while longer yields ended with rather small changes, as did US yields. The German 2-year yield closed lower by 3bp, the 10-year yield was almost unchanged. Intra-Euro-zone spreads mostly saw some narrowing.
Month-end flows are set to give bonds a small boost today, but headwinds are in the pipeline and yields are likely to head higher during the remainder of the week (see more below).
The Eonia overnight rate continued to surge higher, hitting 46bp. However, the rate is likely to fall back clearly, as the month end has passed and a new injection of liquidity enterers the system (see more below).
Equities had a positive day yesterday. European equities jumped by more than 1%, while in the US S&P 500 gained by 0.48%. Asian equities are trading mixed this morning, while Europe is set to open roughly flat.
Downside surprises in Euro-zone inflation continue – ECB to act soon?
German EU harmonized inflation rebounded from 0.9% y/y to only 1.1% in April, clearly lower than expected. Downside surprises in inflation numbers thus continue, something the ECB will be increasingly uncomfortable with. If today’s Euro-zone flash estimate for April inflation at 11:00 CET does not produce a clear rebound, action at next week’s ECB meeting looks almost inevitable.
Finland sinking deeper into the swamp – risks increasing for Finnish bonds
The Euro-zone economic sentiment indicator fell surprisingly after 11 consecutive gains, but it is the Finnish numbers that are causing bigger worries. Finnish sentiment continued to fall, and the gap to the Euro zone has ballooned lately to its widest in more than 10 years. ESI was not the only piece of negative news coming from Finland, as monthly building permits printed at their weakest level in more than 10 years.
Poor Finnish economic performance only adds to the risks of a weakened rating outlook and the repercussions of the Ukrainian/Russian crisis. Finnish bonds have avoided larger losses so far, but the risks are mounting, and we expect Finnish bonds to feel pressure going forward.
Liquidity pressures with temporary easing
Banks borrowed EUR 172.6bn from the latest ECB’s main refinancing operation, around EUR 50bn more than the maturing amount. The SMP sterilization operation, in turn, fell short by almost EUR 70bn, also leading to a short-term boost to liquidity. Today, the ECB will release the results of the latest 3-month refinancing operation (at 11:15 CET), where the maturing amount is some EUR 5bn. This operation can thus really change the liquidity picture to one direction.
The more than EUR 100bn boost to liquidity should alleviate money market tensions in the near terms, push the Eonia overnight rate back lower and ease the pressure on the ECB to actively bring overnight rates down. Still, the trend in excess liquidity remains down, which will keep volatility in the overnight rate elevated.
China to become the biggest economy already this year?
One of the big headlines this morning is that China would overtake the US to become the largest economy in the world already this year, in purchasing power parity terms. The new estimates are based on the International Comparison Program hosted by the World Bank, while the previous update to the estimates was from 2005. As the new estimates illustrate changes in calculations, their significance in practice will be limited. However, they may have an impact in politics, e.g. when talking about the control of international organizations such as the IMF. When measuring nominal GDP with market exchange rates, China was still only some 55% of the US GDP last year.
Near-term-data to surprise to the upside – curve steepeners with potential
After the big move lower in Euro-zone yields this year, there are plenty of triggers for a correction higher in the near term. True, the flash estimate for Euro-zone April inflation may not rebound as much as looked probable still a while ago (numbers released today at 11:00 CET), but expectations should have fallen already after yesterday’s German numbers. Near-term US data, in turn, is likely to surprise positively. US Q1 GDP numbers will be released today at 14:30 CET, but it is the April payrolls report on Friday that really has the potential to send yields higher.
The Fed, in turn, will release its latest statement at 20:00 CET, which will include another USD 10bn tapering move. The statement is unlikely to include big surprises, but risks are tilted towards somewhat higher yields after the statement.
In other data today, Spanish Q1 GDP will be released at 9:00 CET (likely confirming the 0.4% q/q estimate by the Bank of Spain earlier), the ADP employment report will be out at 14:15 CET, Belgian Q1 GDP at 15:00 CET and the Chicago PMI at 15:45 CET.
Finally, the ECB will release the Q1 bank lending survey at 10:00 CET, while the ECB’s Cœuré will speak at 11:00 CET.
New 15-year benchmark from France
France will auction a new 15-year benchmark today, maturing in the May of 2030, while it will re-open its 10-year benchmark at the same time. The combined size of the auctions will be EUR 7 to 8bn.
Nordea