A hard day yesterday for the US as Q1 2014 GDP numbers came in a lot below consensus estimates. A weaker dollar and a drop in US rates followed, whereas stocks registered modest increases. Euro rates were to begin with slightly boosted (and stocks modestly up on average) by the satisfactory flash inflation numbers yesterday, but spillover from the US erased the increase over the day.
Regarding the Fed, on one hand Janet Yellen was careful to underscore that for a considerable period after the dismantlement of QE3, one should expect no rate hikes. On the other hand, the Fed Board of Governors filed a public meeting notice (it has to be sunshine public) to discuss medium-term policy issues, a possible sign of concrete talks about a larger exit strategy. We’ll see in three weeks.
In Govie space, yesterday’s French auction went well overall with May2024 yielding 2.00%, down 15bps from previous tap on April 3rd. The new May2030 benchmark saw decent demand with 4.13bn issued with a bid to cover of 2.21.
EUR inflation: Not out of the woods
Yesterday’s Eurozone inflation numbers came in better than feared: 0.7% and 1.0% for core inflation. This was enough for the inflation swap market to tick up modestly, and is in our opinion not enough for the ECB to address fading inflation at the coming meeting. However, there are clear risks for inflation-derived ECB easing in the near future. On the inflation market, two things are of particular worry: (1) an expected downward path in prints over the summer and (2) the massive divergence in marked implied inflation levels and those of the ECB (and the professional forecasters), see chart at the end of the text.
EUR short rates & liquidity: Not out of the woods.
Taking tally of the extant operations: Yesterday’s allotment on the 90d operation gave a net injection of €8.24bn, and on Tuesday the MRO net injected €50.8bn and the SMP-sterilization came short €68.6bn. All in all these amounts to an isolated sign of the existing facilities filling their purpose and will of course boost excess liquidity, but overall the trend in excess liquidity is likely to be falling yet with a decreasing trend that dwindles quite strongly. Short Eonia swaps have fallen 4-8bps over the most recent sessions (for the 1W & 1M swap respectively) in response to this. So while the Eonia curve remains inverted, clearly the immediate easing expectation/pressure is waning a bit. The fixing itself, pushed by month end is at 40bps.
ECB – in sum
Now the lack of ingenuity in the last two headlines was on purpose, really. Both issues are ongoing and both can conceivably prompt ECB action within the coming months. Our overall take so far on the recent inflation numbers and the jitters in the short end of the Eonia curve is that neither is enough for the ECB to act. However, neither problem is solved, and the ECBs easing bias is by no means gone although yesterday’s optimistic Spanish economic forecasts also reduce any pressure to act. These are just forecasts though, by no means hard data.
US growth disappoints for Q1 2014
Weather was is? Might be as the Q1 2014 US GDP growth came in at a fearsome +0.1% QoQ. It was expected to drop to 1.2% following Q4 2013’s 2.6%, but clearly this is a lot even for weather aficionados. Simple extrapolation should not be done however, cf. our economist’s take here. This number hit the market pre-FOMC and e.g. 5Y US swap rates were down 4-5bps at one point. Also, the dollar weakened against most peers including the Euro which got as strong as 1.387 at one point in the afternoon.
May 1st: Limited data and no supply
Today’s calendar is light with the highlights being US ISMs this afternoon. Friday shares this trait, but does contain the big one – non-farm payroll. Focus is as always high here but has been boosted by today’s disappointing GDP numbers and a rebound from last month’s reading is sorely needed. Yesterday’s warm-up in the form of the ADP number was promising as it came in at 220K (10K above consensus).
Nordea