German bond yields ended yesterday lower, but US Treasury yields climbed after the Fed’s message. The German 10-year descended by 1bp, while the US 10-year yield closed 3bp higher (the 5-year yield jumped by 6bp). Intra-Euro-area spreads narrowed for a change.
German yields are set to open higher today on the back of higher US yields, but bonds should find support later on disappointing TLTRO numbers (see more below). Intra-Euro-area spreads, in turn, should see more widening pressure.
European equity markets ended yesterday with around 0.5% gains, while in the US S&P 500 closed higher by 0.13%. Asian markets are trading with broad gains this morning despite fresh data showing Chinese house prices falling in 68 of the 70 cities followed in August. Also European equities are set to open higher.
Fed’s biggest changes in dot plots again
The Fed’s statement did not take a turn towards more hawkish yesterday. Instead, the rhetoric on inflation was changed to slightly move dovish from inflation has moved somewhat closer to the Committee’s longer-run objective in July to inflation has been running below the Committee’s longer-run objective in September. The part that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends was retained.
However, the FOMC interest rate forecasts were revised higher again. The median for end-2015 rose from 1.125% to 1.375%, the one for end-2016 from 2.50% to 2.875%, while the end-2017 forecast was put at 3.75%, in line with the longer-run estimate.
The Fed also provided updated information on its exit strategy, saying the interest paid on excess reserves would be the primary tool to control the fed funds rate after rate hikes start, while balance sheet reduction would take place primarily by ceasing to reinvest repayments on its security holdings. The Fed does not expect to sell agency MBSs as part of the normalization process.
In the press conference, Yellen tried to explain that one should not interpret considerable time to mean an exact period of time, as the Fed would alter its plans based on data developments. Considering the sizable gap between current market expectations as implied by fed funds futures and the FOMC median, there is room for market rates to increase even if economic data does not surprise notably to the upside. However, inflation and wage data will continue to receive a lot of attention.
Soft US inflation data not adding pressure on the Fed
US August inflation data were much softer than expected. Excluding food and energy, prices were unchanged on the month, which means the annualized 3m/3m rate fell from 2.4% to 1.8% and the y/y rate from 1.9% to 1.7%. The data certainly do not point to price pressures picking up, which means the Fed is still not in a hurry to start tightening policy.
The NAHB housing market index, in turn, continued to surge higher, from 55 to 59, the best level since 2005. The housing market outlook thus appears to have picked up again.
It’s a no
Scotland will vote for its independence today. Most recent polls have shown the no-camp in the lead, and most likely the no-votes will prevail also in the vote. True, the polls have also shown a considerable amount of uncertain votes, but most of the ones balancing between the two alternatives are likely to pick the less uncertain alternative – which is to stay as part of the UK.
A no-vote should lead to some relief, mainly in the UK markets, but it would also be supportive of some spread narrowing in the Euro area (tomorrow). A yes-outcome would lead to much larger market moves.
The voting booths will close at 22:00 CET, and exit polls will follow. Final results are expected early on Friday.
First TLTRO to disappoint
The ECB will release the results of the first TLTRO today at 11:15 CET. The number is likely to be relatively low, and disappoint expectations. Even though it makes sense to look at the two initial operations together to estimate interest, a low number today is likely to boost German bonds again, as it will lead to increased expectations that the ECB cannot meet its targets with the measures announced so far and will be forced to do more later. For more on our expectations on the TLTRO.
Elsewhere in the calendar, UK August retail sales will be released at 10:30 CET, US August building permits and housing starts & weekly jobless claims at 14:30 CET and the Philadelphia Fed manufacturing index at 16:00 CET. In addition, the Fed’s Yellen will speak at 14:45 CET.
Spanish, French and US supply ahead
Today will be the busiest day of the week also on the supply front. Spain will auction a new 3-year benchmark for EUR 2.5 to 3.5bn. France, in turn, will offer nominal bonds maturing in 2016 and 2019 for a combined EUR 7 to 8bn, and three inflation-linkers for a total of EUR 1 to 1.5bn.
In the US, USD 13bn of 10-year TIPS will be sold.
Nordea