Core bond yields finally rebounded higher yesterday, as did the oil price. The German 10-year yield ended the day up by 3bp, while the corresponding US yield jumped by 7bp. Curves bear-steepened. Intra-Euro-area spreads continued to narrow.
Oil prices jumped. The front contract of Brent rose from an intraday low of USD 67.5 to above USD 72, a sizable move but this still leaves prices around the levels, where they started last Friday. Still, the sizable rebound was at least the beginning of establishing support.
Euro-area inflation expectations continued to sink. The 1-year inflation swap rate already fell to negative territory, before rebounding to end the day at barely a positive reading. Longer inflation swap rates fell clearly as well, a development not welcome for the ECB.
German yields are set to open higher this morning, and the move higher in core yields likely has some more to run today. More positive US data, especially Friday’s employment report, certainly has the potential to push yields further up. However, the bigger picture has not changed, and the upside potential for EUR yields is still limited by the lack of inflation and expectations of further ECB measures.
Equity markets did not have a positive day. The Stoxx 600 took a loss of 0.46%, while in the US the S&P 500 slumped by 0.69%. Asian markets are trading mostly higher this morning, however, while Europe is set to open slightly higher.
ECB covered bond purchases jump
The ECB announced it had settled EUR 5.1bn of covered bond purchases last week, bringing the total amount on the programme to EUR 17.8bn. The first week of buying in asset-backed securities, in turn, amounted to EUR 0.37bn.
Last week was busy in terms of covered bond issuance, so one should not conclude that the pace of covered bond purchases would have picked up for good. The big picture remains that the ECB needs to expand its bond purchases significantly in order to meet its balance sheet targets, and government bond purchases are set to be brought into the mix early next year.
US ISM giving an overly rosy picture
The US manufacturing ISM index surprised positively by falling only modestly from 59.0 to 58.7. The new orders index climbed from 65.8 to 66.0, while new export orders jumped from 51.5 to 55.0.
The US economy is no doubt enjoying good momentum at the moment, but the manufacturing ISM is likely overstating the pace of the recovery. In fact, the alternative Markit manufacturing PMI has fallen from 57.9 in August to 54.8 in November.
Euro-area outlook still clouded
The final November Euro-area manufacturing PMIs underscored the feeble performance of the economy. The flash reading of 50.4 was revised to 50.1. The downward-revised German reading of 49.5 means all the three biggest Euro-area economies now have their PMIs below 50. There were some bright spots, though. The Spanish PMI climbed to a 89-month high of 54.7, the Dutch index hit a 9-month high of 54.6, while the Irish reading of 56.2 remains positive despite a fall. Still, these countries will not be able to boost the Euro-area economy much without help from the bigger members.
Euro-area PPI and Fed speeches ahead
Today’s calendar looks very light. Euro-area October PPI will be out at 11:00 CET, while the Fed’s Fischer will speak at 14:10 CET and Yellen at 14:30 CET. Yellen will give welcoming remarks to students, and will not speak from a prepared text or take questions, so her appearance should be uninteresting from a market perspective.
Nordea