Short German bonds rallied, curves steepened and spreads crashed after the ECB announced another easing package. 2- and 5-year German yields plunged by almost 6bp, with the number of countries seeing negative yields in the short end of the curve growing. Spanish and Italian 10-year spreads vs Germany plummeted by more than 12bp, while at 2.16%, the Spanish 10-year yield is already targeting 2%. The Italian 10-year yield sank to a new record low just above 2.30%. The EUR/USD, in turn, fell below 1.30 for the first time in more than a year.
The picture was quite different in the longer end of the curve. Positive US economic data (see more below) lifted US yields along the curve, and longer German yields finally climbed as well. The German 10-year yield ended the day higher by 1.5bp, while the 30-year yield jumped by almost 8bp. The US 10-year yield, in turn, finished the day higher by 5bp.
Longer yields are likely to continue to feel upward pressure today, as strong US data is set to continue and a truce may be agreed in Ukraine (see more below). The looming weekend, however, should limit the upside for yields, and as we have seen so many times before, many market participants quickly take advantage of a jump in yields and establish new long positions.
European equities generally recorded gains of more than 1%, but these gains were not carried over to the US, where the S&P 500 retreated by 0.15%. Asian markets are mostly trading slightly lower this morning, and Europe is set to open with minor losses.
ECB surprises with another easing package
Draghi delivered more easing yesterday, taking markets by surprise. The ECB decided to cut all its benchmark rates by 10bp, meaning the main refinancing rate sank to 5bp and the deposit rate to -20bp. In addition, it announced a broad-based ABS purchase programme coupled with another covered bond purchase programme. The decision was not unanimous: some were opposed to such a package, while others wanted even a more easing at this point.
The ECB looks quite worried as it clearly had to accelerate the announcement of further easing, and remains ready to do more as needed. However, it will be reluctant to consider further moves, before is sees how its announced measures will be received.
The ECB’s message yesterday leaves bond yields free to fall further, spreads to contract and the euro to feel more pressure.
A real cease-fire this time?
Ukrainian President Poroshenko and the main rebel leader are ready to order cease-fires today, according to Reuters, provided they both agree on a peace plan first. Such a cease-fire could also at least delay the next round of EU sanctions on Russia, which appear to be ready waiting for approval. It looks likely a cease-fire will be called today, but the durability of such an agreement remains to be seen. The scepticism such news would receive should limit the size of the market reaction of the news, especially ahead of the weekend.
US economy looking strong
Yesterday’s US economic data provided further evidence that the economy is currently enjoying good momentum. Yesterday, the ADP employment survey showed 200k+ job gains for the fifth month in a row, the trade balance was smaller than expected in July, jobless claims provided another low number, while a rise to 59.6 in the non-manufacturing ISM index put it at its best level in 9 years. The employment component of the non-manufacturing ISM index, in turn, rose to 57.1, pointing to an increasing pace of job creation.
Payrolls Friday to crown the week
All eyes will turn to the US August employment report at 14:30 CET. Another report of strong job gains looks likely, keeping the unemployment rate trending lower. The primary focus is likely to be on the wage data, and after undershooting in July, the data could easily overshoot this time, which would deliver a blow to bonds and push yields higher.
Elsewhere in the calendar, German July industrial production data will be released at 8:00 CET, the revised Euro-area Q2 GDP numbers will be out at 11:00 CET, and the Fed’s Rosengren will speak at 21:45 CET.
On the ratings front, Moody’s has the chance to review its rating on Portugal.
Nordea