QE3, it was good to know you, won’t miss you though. As expected the Fed yesterday announced the end of QE3 and coupled that with a sentiment that overall was rather hawkish. Firstly, the recent turmoil (that two weeks ago briefly saw 10Y treasuries yielding 1.86%) was largely dismissed as just noise. Secondly, the characterization of the labor market was also hawkish and optimistic, and thirdly, the inflation drops (especially in expectation form, e.g. 5y5y) was if not ignored, then certainly downplayed with “the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year”.
The market result of this was first and foremost a re-pricing of the front of the US curve, essentially a re-pricing of the Fed. The 2Y2Y transatlantic spread which had fallen about 45bps from mid-September, immediately re-widened almost 10bps. We would position for more widening here, and in general being short the US front end as the Fed quite simply had been priced way too low over the past month in our opinion.
For Europe and the ECB, this was good news as well, first and foremost through the swift drop in EURUSD to below 1.26. All else equal this helps strongly on inflation expectations which of course remain the main issue for the ECB. Today offers some prelude to Friday’s October flash, chiefly among them the German flash numbers.
The front of the EUR curve is “locked”, but 5Y isn’t really
Lost in the shuffle a bit after the highly volatile sessions on markets two weeks ago, is the fact that the 5Y EUR swap rate now has bounced back about 10bps, less than the longer end, sure, but still a lot given the perception of the ECB anchoring it. It is also at odds with the pricing of short dated expiries on the swaption market which remains near all-time lows on 5Y tails. Case in point, an atmf 3m5y receiver swaption trades just over 30bps entailing a break-even of about 47-47.5bps, just marginally less than today’s quote and above the depths of two weeks ago. Furthermore, such positions are well suited for further easing from the ECB or even just high speculation on such.
Nordic turmoil – more cuts to come ?
Lots of action and very interesting points on them in our most recent Northern Lights publication. The Swedish Riksbank is now at the end of the line with a repo-rate of zero following Tuesdays cut, a cut may be in the offering in Norway, and while not imminent (by no means) another one may also come in Denmark. Meanwhile, Finland has been downgraded.
Today’s data and supply
There’s plenty of interesting hard data from the Eurozone today with German unemployment 9.55 CET and Eurozone consumer confidence at 11.00 CET. Furthermore, flash inflation for e.g. Germany for October (the Eurozone composite is on Friday). From the US, we get Q3-GDP numbers this afternoon as well as jobless claims and data for personal consumption.
Today’s sovereign supply is primarily Italian as Italy auctions in the 2019 and 2024 fixed rate bonds and the 2020 floater. Later, the US sells 7-year notes. The remainder of this week’s supply comes from the UK tomorrow with auctions in 1M, 3M and 6M bills.
Nordea