German bond yields ended Friday largely flat, but US Treasuries rallied in earnest. The US 10-year yield plunged by 8bp to below 2.20%, the lowest in more than a month. Clearly then, the time is not ripe for a bigger move higher in US yields either yet. The narrowing in intra-Euro-area bond spreads mostly continued.
Euro-area inflation expectations continued to fall, with the 10-year zero-coupon inflation swap rate dropping to around 1.30%, almost equalling the mid-October lows. The 5-year rate, in turn, has plunged to its lowest since 2008. US inflation expectations dropped as well.
Oil prices are still in free fall. The Brent oil has tumbled below USD 70 already this morning, which continue to feed ever lower inflation expectations.
German yields are set to open lower this morning, but core yields are likely to end the day somewhat higher on both sides of the Atlantic.
Equity market changes were in general rather limited on Friday. The Stoxx 600 retreated by 0.07%, while S&P 500 descended 0.25% (though after hitting new record intraday highs earlier in the day). Asian markets are trading mixed this morning, while European markets will open with downward pressure.
Euro-area inflation drops only modestly – for now
The Euro-area November inflation numbers were probably a small sigh of relief for the ECB, though only temporarily. Headline inflation edged lower from 0.4% y/y to 0.3%, back to the level seen in September, while core inflation (headline excluding energy, food, alcohol and tobacco) was unchanged at 0.7% y/y. Still, falling energy prices are set to drive inflation ever lower and the market pricing for the fixings (for the headline excluding tobacco) for the coming months are in negative territory. The inflation picture thus very much continues to support further easing measures from the ECB.
German ECB member against further easing – no surprises here
The German ECB Executive Board member Sabine Lautenschläger argued against broad-based bond purchases in an interview over the weekend. She said in her view a consideration of the costs and benefits, and the opportunities and risks of a broad purchase programme of government bonds does not give a positive outcome at the current time. She added that to her, given the current situation, the hurdles for further measures are very high, especially for broad purchase programmes.
The analysis of the potential of broad-based asset purchases given by Vice-President Constâncio was quite different last week, and his views more likely reflect the majority of the Governing Council. In conclusion then, it is no big surprise that the Germans are against further easing measures, but as we have already seen in the decisions taken, the German opposition does not prevent the ECB from easing further.
Strong payrolls and ECB easing ahead?
This week’s calendar looks quite interesting. The ECB will debate further easing measures on Thursday, while the US labour market is likely firing on all cylinders, to be confirmed by the November employment report on Friday.
In today’s calendar, the highlight will be the US manufacturing ISM index at 16:00 CET, which is set to retreat from high levels. In addition, the final November Euro-area manufacturing PMI will be released at 10:00 CET, UK manufacturing PMI at 10:30 CET and the final US November Markit manufacturing PMI at 15:45 CET. The ECB’s Costa will speak at 10:30 CET, the Fed’s Dudley at 18:15 CET and Fischer at 19:00 CET.
German, Spanish and French auctions on the agenda
This week’s EUR government bond auctions will concentrate on Wednesday and Thursday, though the sizes are relatively small. Germany will re-open its 5-year benchmark for EUR 3bn on Wednesday, while France and Spain will sell bonds on Thursday. France will offer bonds maturing in 2023, 2025 and 2027 for a combined EUR 3 to 4bn, while Spain will sell bonds maturing in 2017, 2020 and 2024.
Coupon and redemption payments from EUR government bonds will provide a EUR 15bn cash injection this week, stemming from Italian bonds.
Nordea