Longer German bond yields edged marginally higher yesterday (10-year yield by half a bp), while longer yields fell a bit. The development of US Treasury yields was the opposite: longer yields fell a bit (10-year yield down by around a bp), while shorter yields climbed. Intra-Euro-area spreads narrowed, though the moves were not very large.
Core yields should have some more upside left today, while volatility is likely to be elevated during the ECB’s press conference (see more below).
The dollar has continued to strengthen. EUR/USD has made fresh 2-year lows at around 1.23. Brent oil, in turn, continues to find support around USD 70.
Equities continued to gain. The Stoxx 600 advanced by 0.57%, while S&P 500 edged higher by 0.38%, ending at new closing highs. Asian markets are trading higher this morning as well, and Europe is set to open with positive momentum.
US economy maintaining momentum
Yesterday’s news coming from the US economy continued to support the picture of good performance. True, the ADP employment report printed at 208k, slightly weaker than expected, but it is still consistent with strong growth in payrolls. The non-manufacturing ISM index, in turn, jumped from 57.1 to a strong 59.3.
Finally, the message in the Fed’s Beige Book was broadly positive. It reported that national economic activity continued to expand in October and November, a number of Districts also noted that contacts remained optimistic about the outlook for future economic activity, while employment gains were widespread across Districts, and Districts reporting on business spending generally noted some improvement.
ECB needs to deliver, but not ready for government bond purchases yet
The ECB is clearly worried about the falling inflation and inflation expectations. So much so that Draghi felt the need to assure the ECB will do what we must to raise inflation and inflation expectations as fast as possible. Inflation expectations have fallen further since his speech. As the central bank is unlikely to be ready to start buying government bonds yet, an interim step of expanding the bond purchases to corporate bonds and supras & agencies looks more likely. In addition, adjusting the terms of the TLTROs seems possible.
Amidst ever higher expectations of a large-scale bond purchases, including government bonds, a modest expansion of the purchases may not be enough to push core bond yields much lower. In fact, the absence of clear signals that more would follow early next year could actually lead to some profit taking and thus higher yields.
The ECB’s interest rate decision at 13:45 CET is not hugely interesting, but the press conference starting at 14:30 CET will be.
Elsewhere in the calendar, the Bank of England will reveal its unchanged interest rate decision at 13:00 CET, while US jobless claims will be out at 14:30 CET. In addition, the Fed’s Mester will speak at 14:30 CET and Brainard at 18:30 CET.
Spanish and French auctions ahead
Today will be busiest day of the week in terms of EUR government bond auctions. Spain will sell bonds maturing in 2017, 2020 and 2024 for a combined EUR 2.5 to 3.5bn. France, in turn, will offer 2023, 2025 and 2027 bonds for a total of EUR 3 to 4bn, a rather modest size for the longer-term French auctions.
Nordea