Rates rebound, bund yield above 1% again, and stocks rebound. 5Y5Y inflation swap has dropped below 2% – Anchor drifting? Jackson Hole on the horizon. TLTRO take-up projections moving down.
Rebound in rates yesterday with e.g. the bund yield back above 1%. Italian and Spanish Govie rates rebounded largely in tandem to Germany. Swap spreads however tightened and on the swap curve 5y5y and 30y remains significantly below 2%. US rates also rebounded as the perception on e.g. the Ukrainian situation was slightly eased. Yesterday’s movement up in stock prices was aided on by strong confidence numbers for US housing as well.
Elsewhere the big movement of late has been the drop in the 5Y5Y EUR HICPxT inflation swap rate, which yesterday went below 1.95% before rebounding slightly.
The most important data today is US and UK CPI data where 2.0% and 1.8% are (consensus) expected respectively. On the US side this week, the big event is naturally Yellen’s appearance at Jackson Hole (commencing on Thursday). Dovishness is to be expected overall, but some details on exit strategies and perhaps a firm statement on the end of QE3 can be in the cards. Regarding the latter, Junes FOMC minutes said QE would probably end after Octobers FOMC meeting.
Longer-term inflation expectations under pressure
“At the same time, inflation expectations for the euro area over the medium to long term continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2%.” A modern classic provided by Draghi on a monthly basis, also on August 7th. But how long does that statement carry validity? With the 5Y EUR inflation swap as low as 0.95% on Friday and the 5Y5Y quote now around 1.96%, the market is sceptical to say the least.
Granted, these numbers are not pure expectations or even particularly accurate forecasts and the latest survey of professional forecasters actually lifted the longer-term projections, but still the statement is starting to look really detached from reality. This is a dilemma for the ECB. New projections from them are due in September and conceivably they could be lowered so that the firm anchor is no more, rather it is drifting and something must be done to make it firm again. How to do that without QE and when to do it when the TLTROs haven’t even begun and its effects will not be known for quite some time.
TLTROs: Expectations going downwards
According to Bloomberg, economists on average are cutting their estimate of TLTRO take-ups. The latest estimate from yesterday reveals an estimated take-up of 650bn euros which is 60bn less than last month’s estimate, and of course significantly smaller than Draghi’s original 1trn assessment. These assessments are naturally correlated with the economic outlook which – on a whole – has seen broad revisions downwards over recent weeks and months, and intensified particularly since last week’s Q2 GDP numbers.
The market impact of this is modest, but in general less TLTRO take-up will all else being equal equate less excess liquidity down the road which again might well mean some re-pricing of the short end of the Euro curves, Eonia in particular. With the fixing flirting with zero again, 0.7bp on Friday and a new record-low of 0.6bp Monday evening, this has also aided in pulling down forwards on the Eonia curve quite substantially, with e.g. 3M, 9M forward recently at 1bp (essentially implying a fair average fixing of 1bp for the period of mid-May 2015 to mid-August 2015). Such levels are worth paying, especially with TLTRO expectations declining.
Supply
Japan has sold 20Y bonds this morning, and the US sells bills this afternoon. Germany to auction bobls on Wednesday and the UK is selling 10Y bonds on Thursday.
Nordea