Markets got spooked by the developments in Ukraine. Recent moves lower in safe haven yields continued and the spot bank overnight lending rate eonia was negative for the first time ever. Equity markets were widely hit.
German 10-year Bund yield made (again!) new all-time lows testing levels below 0.87%. In the US the 10-year Treasury yield came down to 2.34% even though the US data was ok.
Curiously enough the periphery yields edged higher. Even though the markets are expecting new measures from the central bank, the rotten risk sentiment favors German Bunds over periphery bonds. In addition, the inflation data was not as bad as it could have been.
Eonia spot rate was pushed to negative levels (-0.004%) first time ever. Even though the days prior to the end of the month have lately seen higher spikes upwards, this time seems to be different. With the soft economic outlook in Euro area and the Ukrainian situation escalating, markets are pricing in more measures from the ECB.
Today the markets are focused on Euro area inflation and the situation in Ukraine. With the Monday off in the US, most likely the moves will be cautious ahead of the long weekend and safe havens continue to be bid.
Geopolitical tensions on the rise
Ukraine accused Russia yesterday for invading its territory as the rebels advanced in southeast of Ukraine. NATO military officer claimed there were 1000 Russian troops operating in Ukraine. Russia denied allegations.
Developments are likely to add to expectations of a new sanction round which would put more pressure on already soft Euro area economy and support hopes for more ECB easing.
New 5-year lows also for inflation
After yesterday’s inflation numbers from Germany and Spain, we expect Euro area inflation rate to fall to 0.3% y/y in August (flash estimate) – a new cyclical low. This is in line with consensus. We see the risk to our call slightly to the upside.
German consumer prices were flat over the month while consumer prices in Spain rose by 0.1% m/m. We expect 0.1% m/m for the Euro area.
The small downward move in the year-over-year rate should be driven by energy prices. The core rate should stay unchanged at 0.8%.
Low inflation figure will keep the ECB easing hopes alive. We do not expect anything major from the ECB next week so it will be a tough job for Draghi to fill the expectations, again.
Euro area bank lending still subdued
Euro area bank lending to private sector was less negative at -1.6% in July vs -1.8% in June. The lending to households continued slightly lower (-0.5% on annual terms) and lending to non-financial corporations continued down as in June (-2.3%).
No substantial pick-up is in sight though. The ECB orchestrated bank health checks and the stress tests should result in better capital position and help banks to lend out in case there is demand.
Good US data again
The US GDP growth was revised upwards to 4.2% from 4.0% when consensus was looking for a slight downwards revision. Pending home sales rose more than expected in July.
Markets are currently trading on geopolitical concerns and the macro releases get less attention. More interesting US data are out next week with US payrolls.
Finland: Under pressure
Economic data released this week about the Finnish economy does not change the big picture. Domestic demand is under tremendous pressure. Construction falls. The labour market outlook is weak in spite of the surprisingly low unemployment rate in July.
Despite lacklustre economic picture, Finland’s new benchmark bond was well received this week. The 2020 bond was priced 13bp below the swap curve with a yield of 0.475%.
US PCE inflation unchanged?
In addition to Euro area inflation numbers, we get some PCE inflation numbers from the US. Based on the already released CPI data we expect headline PCE inflation to remain at 1.6% In July. The core rate is also likely to be unchanged, at 1.5%. Both forecasts are in line with consensus expectations.
Nordea