German bond yields ended the day higher yesterday in the aftermath of the ECB’s message (see more below). The 10-year yield climbed by 2.5bp. US Treasuries, however, performed, and the 10-year yield plummeted by almost 5bp, while the curve flattened. Intra-Euro-area spreads narrowed in the semi-core, but Spanish and Italian spreads ended the day wider (though much less so compared to the intraday highs).
German yields are set to open slightly lower today, but more upside pressure is likely to be in store in the form of strong US labour market data (see more below).
Oil prices have slipped again overnight, as Saudi Arabia cut its selling prices to the US and Asia. The price for the front contract of Brent has fallen back below USD 70, suggesting the tentative support at around USD 70 is not holding, and prices have more room to fall.
European equities were disappointed by the ECB’s message. The Stoxx 600 slumped by 1.29% (Italian and Spanish markets down by around 2.5%). US equities did better, and S&P 500 ended the day lower by only 0.12%. Asian markets are trading mostly higher this morning, while Europe is set to open slightly up.
ECB to buy everything but gold?
The ECB refrained from new easing measures yesterday, but made clear early next year is the time to assess the need for further action. The statement said early next year the Governing Council will reassess the monetary stimulus achieved, the expansion of the balance sheet and the outlook for price developments, while the Governing Council stands ready to alter early next year the size, pace and composition of our measures.
Draghi went as far as admitting himself that the previous measures were calibrated to a different inflation and growth outlook. In other words, he already admitted that more stimulus measures will most likely be needed. The announcement of a broad-based asset purchase programme thus looks very likely early next year.
The exact contents of an expanded purchase programme will no doubt still be argued. Draghi said the Governing Council had discussed several forms of QE, including buying all assets but gold. Still, he played down the possibility of buying assets denominated in other currencies, as such measures would amount to FX intervention. Draghi added unanimity on QE was not needed, but the programme can be designed to have a consensus.
The move higher in core yields that was seen yesterday is likely to continue in the near future, but the higher yields should be seen as a buying opportunity. New lows in long yields are still ahead, while the euro should feel more pressure. Intra-Euro-area spreads, in turn, could widen a bit on profit taking ahead of the year-end, but longer out spreads continue to have narrowing potential.
Will yields rise this time on strong payrolls?
Also today’s calendar offers plenty of interest, with the highlight naturally the US November employment report at 14:30 CET. Most labour market indicators are pointing to a clearly improving labour market and risks are to the upside to the consensus forecast of net job creation of 230k. The jobs report should thus serve as the latest reminder that the US outlook is totally different from the Euro-area one. Especially after the renewed fall in US yields in the past few days, a strong payrolls report certainly has the potential to open more room on the upside for yields.
Elsewhere in the calendar, German October factory orders will be released at 8:00 CET, US October trade balance at 14:30 CET and US October factory orders at 16:00 CET. In addition, the ECB’s Weidmann will speak at 9:00 CET, Nowotny at 10:00 CET, Visco at 14:15 CET, the Fed’s Mester at 14:45 CET and Fischer at 20:45 CET.
On the ratings front, Standard & Poor’s has a chance to review its ratings on Ireland (A-, positive) and Italy (BBB, negative).
Nordea