Eurozone growth at a standstill: Average equals zero. 10Y bund yield was (briefly) below 1%. British GDP today along with a cluster of US data. 5Y5Y EUR swap rate below 2% and the real rate is negative.
Yesterday’s Eurozone GDP numbers came in as we had expected: Stagnation. Germany posted a contraction of 0.2% q/q, France got par for the course, and of course Italy earlier this month posted -0.2% q/q also. Bright spots were Spain and the Netherlands.
The bund yield was yesterday briefly below 1.0% a milestone indeed around the time of the publication of the GDP figures above, before rebounding to around 1.02%. European stocks slightly (Eurostoxx 600 0.3%) up after an initial selloff on the GDP numbers above. US stocks also marginally up yesterday and the Nikkei index follows the move this morning.
Today’s calendar is apart from British GDP number, US dominated. Amongst others we see Empire manufacturing, PPI numbers, Michigan consumer confidence and data for the industrial production. Today’s supply is limited to U.K. 1m, 3m and 6m bills.
Pro-forecasters revise CPI, GDP down short-term, and up longer term
As expected July Eurozone inflation got confirmed at 0.4% y/y and also yesterday, the new survey of professional forecasters saw a revision down in 2014-15 inflation to 0.7% and 1.2% respectively, but lifted their long-term projections from 1.8% to 1.9%. A similar pattern was evident on GDP. The market could scarcely disagree more and yesterday priced the 5Y HICPxT marginally above 1% and the September fixing is priced around just 0.15%. It is worth noting that the ECB at the September meeting also with address their extant inflation projections.
5Y5Y EUR swap: Get real
The 5Y5Y real swap rate yesterday got below -0.1% for the first time ever. Such levels have been seen in both the US and in the UK but only in periods of large quantitative easing (apart from the immediate aftermath to Lehman’s collapse in the fall of ’08).
Yesterday’s resurgence in stock prices could be – and was indeed widely reported to be – market anticipation of the ECB actually doing QE down the line. This would be a vastly premature conclusion to make however, but the issue is real: How the ECB will be “safeguarding the firm anchor” on inflation expectations without QE remains to be seen.
On the 5Y5Y real swap rate, of everything going into it, to us the displaced variable is the 10Y inflation swap which is too high relative to the 5Y swap and consequently supports a 5y5y inflation quote above 2%. Overall, we find that a real rate of -0.1% is attractive shorting, and that the divergence in nominal 5s10s (flatter) vs. inflation 5s10s (steeper) (cf. chart) is too extreme.
Nordea