Risk sentiment got hit on Friday by news that a Russian aid convoy had crossed Ukrainian border without permission from Kiev. Ukraine answered by claiming movement of trucks cross border to be “illegal”.
Equity markets were down and the safe haven yields were clearly lower. German Bund yield dropped to just over 0.96% and near the all-time lows recorded couple of days earlier. Yield ended the day just below 1 %. In the US the 10-year yield headed slightly lower to 2.4%.
Euro dropped to below 1.32 and thus to its lowest level since September 2013 balancing with the geopolitical concerns and the Jackson Hole messages.
Yields are set to stay on low levels today.
Draghi’s headache: near zero inflation
In his speech in Jackson Hole ECB’s Draghi reacted to the recent considerable drop in inflation expectations by saying that The Governing Council will acknowledge these developments and within its mandate will use all the available instruments needed to ensure price stability over the medium term.
The comments are likely to keep alive the hopes that the ECB adds more stimulus measures to push the inflation expectations back upwards. The hopes should keep spreads tight and yields on low levels for now in Euro area.
More meat on the inflation picture is expected this week as the flash August inflation is out on Friday.
Inflation continues heading for zero. We expect the Euro area inflation rate to fall to new cyclical lows of 0.3% y/y in August from the 0.4% recorded in July. The main risk this time around is to the upside. Core inflation should remain stable at 0.8% as the headline rate is pressured down by energy prices.
Low inflation is certainly a headache for the ECB as it needs to take down its inflation forecasts in September.
The new cyclical lows will make the yells of more ECB easing even louder. Nothing new should be expected though in the short term, as the new long term operations TLTROs are conducted at the end of the year. A failure of TLTROs and inflation still clearly below 1% in H1 2015 would make some form of QE likely.
Yellen not ready yet to raise
In a much-anticipated speech in Jackson Hole the Fed Chair Yellen repeated the balanced discussion of the monetary policy outlook expressed in her congressional testimony in July.
Hence, her speech today did not reflect the more hawkish tone of the July FOMC minutes, released earlier this week, where the discussion seemed to focus on the possibility of earlier increases and not later increases.
Yellen’s comments made clear that she isn’t ready to start raising rates.
German IFO to drift lower today
Today German IFO should decline just as the PMIs did last week. From the US we get flash Markit Services PMI, new home sales and Dallas Fed manufacturing index.
Italy resumes auctions this week with zero-coupon bonds on Tuesday and longer bonds on Thursday.
Nordea