US industrial production came in below expectations, but that seemed to be swiftly attributed to September’s high numbers and we registered modest increases in US rates.
Yesterday in Brussels, Draghi in broad terms repeated his stance from this month’s ECB meeting with the subtle difference of mentioning sovereign bond purchases explicitly. He was adamant that the ECB “want to be seen as ready to act”. That the ECB will go the route of govie-QE seems to be the consensus expectation by now, and indeed ours as well. Mersch went a few steps further in the theoretical purchases, see below.
EURUSD dipped below 1.245 while Draghi was speaking before rebounding. Most concretely, Spanish and Italien govies (beneficiaries of sovereign QE) tightened about 3-5bps relative to Germany. In swaps, a small bounce back to the 10Y swap rates to above 1% after its all-time low close on Friday.
A Bloomberg survey yesterday showed that “just” 40% of economists expected the ECB to actually deliver on the balance sheet target at least in the literal sense of reaching the number from March 2012. The bulk of the remaining 60% seems to be calling for govie-QE as almost everybody sees TLTRO+CBPP3+ABSPP falling short without additions.
ECB: Everything is possible nowadays
With speculations already rampant regarding govie-QE from the ECB, in large part due to themselves and their balance sheet target, executive board member Yves Mersch yesterday got some headlines on tidbits regarding the theoretical purchases of gold, sovereign bonds, ETFs and even shares or real estate. So that’s going at least one better than the boss.
Now granted, Mersch’s stance was defensive and the key word is probably theoretical and indeed the overall message from him was actually to downplay the straightforwardness of the QE-measure. Indeed, “it’s not even been a month that we have begun to purchases covered bonds. With the purchases of ABS’, we are starting just now. Now it is essential to wait and see how our purchase programs develop”. It remains strange then that the ECB then sets a balance sheet target that at the very least causes almost everyone’s subjective probability for a QE scenario to increase.
Draghi himself was also before a microphone with what sounded as largely a replay of the ECB meeting early this month. I.e. largely that they have done a lot, are confident in the moves, would like to see the effects, know that risks loom to both GDP and inflation, and that they are ready to do more if needed. And once more, Draghi highlighted that they (the ECB) cannot do it alone and listed a string of initiatives from structural reforms to a more unified fiscal approach.
ECB: ABS to commence shortly and CBPP3 holds pace
On a more practical note, ABS purchases will thus start this week, and the CBPP3 program now stands at €10.485bn after the ECB bought in excess of $3bn last week. Draghi also stated that the ECB will buy mezzanine loans (in the ABS program) only if there’s a guarantee.
Many € vols trade near all-time lows, but they move more than that
Short expiries on 1y to 5y tails trade as extremely low levels, in many cases substantially lower than the global minimums encountered in the US under the batches of QE there. At the current time, they trade too low. For instance, 6m5y trades at around 31bpVols or about 1.9bp/day implied. It delivers about 2.3bp/day which is low, but sub 2bp “never happens”. It’s worth considering going long these assets.
Today’s data and supply
ZEW numbers for the current situation and for expectations are released at 11.00 CET and the indices have declined steadily for both Germany and the Euro Area aggregate over recent months. Consensus estimates call for marginally positive numbers, but the risk is tilted towards new lows. Elsewhere, PPI numbers from the US and CPI numbers from the UK.
Today’s supply comes from the US with 4 week bills and in the Eurozone from Spain who are in the market to sell €4.5bn 6M and 12M bills.
Nordea