New lows and huge volatility were the name of the game yesterday. The German 10-year yield hit a level of 57bp before rebounding to around 60bp, down 3bp for the day. The US 10-year yield ended the day down by 6bp to 2.06%. Curves bull-flattened further. Intra-Euro-area spreads narrowed, but the moves moderated clearly from the intra-day highs.
Core bonds are set to remain supported early today, but the Fed’s message has the potential to push yields higher in the evening (see more below). Intra-Euro-area spreads are likely to see more widening in the final weeks of the year.
FX markets saw huge volatility, especially the Russian rouble. The daily trading ranges were amazing, for EUR/RUB: 72.78 – 99.56. Even though the rouble recovered from its intraday highs, the currency continues to melt.
Oil prices are continuing their march lower with no end in sight, driving inflation expectations ever lower. The 10-year EUR inflation swap has fallen to 1.06%.
European equities initially continued to fall, but then rebounded, and the Stoxx 600 ended the day up by 1.73%. These gains were not carried over to the US, where S&P 500 lost another 0.85%. Asian markets are trading mixed to lower this morning, while Europe is set to open down.
UK CPI just the first of many downward surprises?
UK November CPI came in clearly below expectations, at 1.0% y/y vs. the 1.2% expected. The numbers followed the downward surprise seen in Chinese data last week, and imply more downward surprises will be ahead in other countries (US numbers out today), as the effects of falling energy prices are underestimated. Such numbers would keep bonds supported.
PMIs increase but the outlook still clouded
Euro-area flash PMIs for December edged higher, with both manufacturing and services gaining and the composite PMI edging up from 51.1 to 51.7, slightly above expectations. Still, the rise in the composite index was not even enough to offset the drop seen in November. The numbers point to ongoing but slow growth, while a weaker euro, looming ECB easing and lower oil prices keep up hopes that the pace of growth could pick up next year.
Time for a more hawkish message
In response to the good momentum in the US economy and gradually emerging inflation pressures, the Fed is likely to change its forward guidance to a more hawkish direction today. More specifically, the time for the reference considerable time is likely up. After the recent fall in yields then, there is room for higher yields in response to the Fed’s announcement. Considering the strong demand longer bonds have seen lately, longer Treasuries are likely to be more resilient to such a message and the curve is set to flatten. The Fed’s statement and updated forecasts will be released at 20:00 CET, while Dr Yellen’s press conference will start at 20:30 CET.
Elsewhere in the calendar, Bank of England minutes will be out at 10:30 CET, final Euro-area November inflation at 11:00 CET and US November inflation at 14:30 CET. US inflation is likely to see a big fall, supporting the demand for bonds further in the afternoon.
In addition, the ECB will release the allotment of its 3-month refinancing operation at 11:15 CET.
Greece – this vote will not count, but could it matter?
The first round of the Greek presidential elections will take place today, but the government is nowhere near to gathering the 200 votes needed to elect the president during the first two rounds of voting. The deciding vote looks set to take place on 29 December, when 180 votes are needed to elect the president. Today’s vote should be a non-event, as the results should not be taken as a clear indication of how the MPs will vote on the third round. Still, there is a risk that already the early results will be interpreted as showing the government lacking the required majority, which would lead to some safety demand of core bonds and wider intra-Euro-area spreads.
Nordea