Bonds rallied on both sides of the Atlantic yesterday, in Europe in a bullish-flattening fashion. The German 10-year yield fell by 3bp, while the corresponding US yield retreated by around 1bp. Intra-Euro-area spreads ended the day wider outside the semi-core countries.
Bonds are set to find more demand today, and yields edge further down. The German 10-year yield is trading at just above 1%, and is likely to fall back below this threshold in the near future.
Equity markets felt clear pressure yesterday. European markets took losses of around 0.5%, while in the US S&P 500 took a hit of 0.80%. Asian markets are trading somewhat mixed this morning (Japan is closed), and Europe is set to open close to flat.
Draghi underlines the ECB’s new goals
The ECB’s Draghi further implied that the ECB had shifted the way it is conducting monetary policy yesterday. He said with the purchase programmes announced in September, we are starting a transition from a monetary policy framework predominantly founded on passive provision of central bank credit to a more active and controlled management of our balance sheet. The ECB could thus easily define a more formal balance sheet growth target going forward, and then pursue this target with any measures it would take to reach it, possibly including the buying of government bonds.
On the first TLTRO, Draghi said the allotment was within the range of take-up values we had expected based on banks’ revealed behaviour under previous programmes, i.e. he did not sound too disappointed. He admitted the economic recovery in the euro area is losing momentum, and added given the prolonged period of low inflation that we have already experienced, we will closely monitor risks to price developments looking forward. We will focus in particular on the possible repercussions of dampened growth dynamics, geopolitical developments, exchange rate developments and the pass-through of our monetary policy measures.
All in all, Draghi’s message further illustrates that the ECB means business this time, and stands ready to expand its stimulus measures, as needed. The market is thus likely to continue to price in even more stimulus. However, Draghi did remind that the ECB cannot do it alone, and the ECB’s monetary stimulus must be complemented by courageous structural reforms and proper fiscal policy.
“We need the economy to run a little hot”
The Fed’s Dudley said yesterday we really need the economy to run a little hot for at least some period of time to push inflation back higher. He added there were reasons to try to be patient, when tightening policy, and said people should not overweight the value of the FOMC interest rate forecasts. In other words, he did not appear to be in any rush to start tightening policy.
China’s PMI rebounds
The HSBC/Markit flash manufacturing PMI for China rebounded in September, from 50.2 to 50.5, slightly better than expected. The numbers should help to ease concerns about the state of the Chinese economy to some extent. Among the details, both new orders and new export orders rebounded more than the headline, while the employment index sank to its lowest since 2009. Despite the rebound in the PMI, the growth effects the rebalancing of the Chinese economy has will continue to cause worries.
Euro-area PMIs and a flood of central bank speeches ahead
The flash Euro-area PMIs for September should gather plenty of attention at 10:00 CET. After the clear decline in August, expectations appear to be centred towards a roughly unchanged reading this time. If such anticipations prove to be overly optimistic, ECB easing expectations would be boosted further. The French numbers will be released already at 9:00 CET and German ones at 9:30 CET.
In US data, the FHFA house price index for July will be out at 15:00 CET and the preliminary September Markit manufacturing PMI at 15:45 CET.
Central bank comments will also be listened to very carefully. The Fed’s Bullard will speak at 15:00 CET, Powell at 15:20 CET, George at 15:30 CET, Kocherlakota at 20:00 CET and the ECB’s Costa at 20:15 CET. This week’s main refinancing operation allotment, in turn, will be revealed by the ECB at 11:15 CET.
On the issuance front, this week’s US benchmark auctions will be set in motion by the USD 29bn 2-year offering.
Nordea