German bonds performed again early yesterday, and the 10-year yield hit a new low at just below 0.72%. Yields subsequently rebounded on the back of positive US economic data (see more below), and the 10-year yield finally ended the day up by a sizable 6bp. The US 10-year yield initially plummeted below 2%, but then bounced to end at 2.16%, up 2bp for the day. Huge volatility thus continued in the bond markets.
Intra-Euro-area spreads widened across the board. Dutch, Austrian and Finnish 10-year spreads initially jumped by around 5bp, while French and Belgian spreads expanded by some 10bp, but the moves moderated towards the evening. Italian spreads exploded, and the 10-year spread was trading at more than 30bp wider vs Germany compared to the day before, but at the end of the day, the widening was only some 9bp. Spanish bonds continued to outperform Italy. Large spread moves are likely to continue in the near future, and spreads have more room to widen.
Greek bonds continued to take a hit, with the 10-year yield touching 9% already. Reuters reports that the ECB is planning to loosen its haircuts on Greek bonds, which would provide some help for the Greek market, but would do little to solve the underlying problems.
The rollercoaster ride continued in equity markets as well. In Europe, the Stoxx 600 index initially gained, then plunged 3% before recovering to a daily loss of 0.43%, the eighth negative day in a row. US markets recovered from their early weakness, and S&P 500 closed flat (up 0.01%). Asian markets are trading mostly lower, and European markets are set to see more pressure this morning.
The markets are showing more signs of stabilizing, but the risks remain of a further leg lower in both bond yields and equities, especially ahead of the weekend.
US labour market continues to have strong momentum
US weekly jobless claims plunged to a 14-year low yesterday. Even though weekly numbers can be quite volatile, the trend in claims is pointing clearly lower and implying continued strong momentum in US labour markets and a pick-up in payrolls growth. Also US September industrial production and the Philadelphia Fed manufacturing index beat expectations yesterday, while the NAHB housing market index was a clear disappointment with a drop from 59 to 54, reversing the big jump from the previous month.
In general, the US economy continues to do well, though if the recent bout of risk aversion is extended, it will have a negative effect in the US as well, starting from sentiment data.
Bullard calls for extending QE
The Fed’s Bullard (currently non-voter) became the first Fed official to publicly suggest the Fed should extend its asset purchases amidst falling inflation expectations. He said falling inflation expectations were an important consideration for a central bank, and for that reason he thought a logical policy response at this juncture may be to delay the end of the QE. However, at the same time he thought the first rate hike could still take place at the end of Q1 2015, assuming global market turmoil would not affect US prospects.
Mr Bullard is thus at the same time towards the hawkish end of the FOMC regarding the first rate hike and dovish in terms of being very worried about low inflation pressures and falling inflation expectations. The centre of the FOMC remains rather dovish as well, and at least if history is of any guide, the Fed will ride to the rescue, if market turmoil continues.
Yellen to the rescue
All eyes will be on the Fed’s Yellen today, when she will speak in Boston at 14:30 CET. The topic of the speech is inequality, but it is not uncommon for central bankers to include a message on monetary policy in a speech, if there is a need for that. Dr. Yellen will probably try to say some soothing words, reassuring that the Fed is not in a hurry to tighten policy, if economic conditions do not warrant such action. She could also leave the door open for extending QE, if necessary. A dovish message would likely cause a stronger positive reaction in the equity markets, which would limit the performance in the bond market, and curve would most likely steepen.
Plenty of ECB speakers will enter the stage as well. Cœuré will speak at 8:45 CET, Constâncio at 9:45 CET, Nowotny at 10:00 CET and Weidmann at 11:00 CET.
US data flow will continue, with September building permits and housing starts at 14:30 CET and preliminary October University of Michigan consumer confidence at 15:55 CET. Further, the latest ECB 3-year LTRO repayment data will be revealed at 12:00 CET.
On the ratings front, Moody’s has a chance to review its Baa2 rating on Spain. The outlook has been positive since February, implying an upgrade would be possible, but the uncertainty created by the recent Euro-area economic data and market turbulence may prevent an upgrade at this point.
Nordea