The German 10-year yield revisited its record-lows yesterday, but rebounded a bit towards the evening to end the day only marginally lower. US yields saw bigger moves, and ended the day clearly higher in the aftermath of the Fed (see more below). The 10-year yield jumped by 8bp, while the 5-year sector leapt by almost 10bp. Intra-Euro-area bond spreads mostly widened a bit in the semi-core, but narrowed otherwise.
Also European yields are set to head higher today, but the losses for core bonds should still end up being contained. Some more gains are still in store in the final weeks of the year.
The Russian rouble rebounded strongly in volatile trading conditions, as the central bank unveiled measures to ease bank capital requirements, FX liquidity support to ease worries over maturing FX loans, while the Finance Ministry conducted FX interventions. USD/RUB has plunged to around 60 from the intraday highs of close to 80 on Tuesday. Also a small rebound in oil prices helped the Russian markets, as Brent has rebounded back above USD 60. Still, the pressure for the rouble is likely to continue in the near future as long as oil prices fail to stabilize.
European equities finally closed the day almost flat (Stoxx 600 up by 0.14%), but in the US S&P 500 had its best day of the year after a jump of 2.04%. Asian markets are trading higher as well this morning, and Europe is set to open up.
The y/y fall in Chinese property prices accelerated from 2.6% to 3.7% in November. However, the monthly fall was smaller compared to October. Still, prices continue to fall, keeping a property market crash one of the risks facing the Chinese economy.
Fed changes guidance – revises rate forecasts lower
The Fed’s new guidance on rates states that the Committee judges that it can be patient in beginning to normalize the stance of monetary policy¸ while the central bank added this guidance is consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time. The rate forecasts were revised lower, with the median FOMC projection for end-2015 taken down from 1.375% to 1.125% and that for end-2016 from 2.875% to 2.50%.
All in all, the Fed’s message confirms that the central bank is preparing for the first hike around mid-2015, leaving room for US yields to head higher, as the first rate hike approaches. The fed funds futures market is pricing in the first 25bp Fed hike by the end of the third quarter next year.
Any German bonds left for investors?
Germany intends to sell EUR 147bn of nominal bonds next year, sharply lower from the EUR 161bn issued this year. That would mean a negative net issuance of EUR 8bn, quite a fall from just three years ago, when net supply amounted to EUR 50bn.
A look by maturities is even more striking. The issuance of 2-year bonds will actually increase, meaning 5- and 10-year issuance volumes will plunge. Germany is set to issue EUR 39bn of 5-year bonds and EUR 46bn of 10-year bonds next year, down from EUR 48bn and EUR 54bn this year, respectively.
The supply outlook thus very much favours subdued German yield levels.
ECB easing expectations cemented further
If anyone was still having doubts over the ECB’s willingness to ease further, Executive Board member Cœuré did a good job of dashing such doubts in an interview yesterday. He said I see a broad consensus around the table in the Governing Council that we need to do more. If we had been in a position to cut rates at the last meeting, we would probably have done so. It’s not that much of a question on whether we should do something, but more a discussion on the best way to do it.
On the form of the easing, he said if we want to do more we obviously have to reach out to market segments where there is more liquidity and that is why the government bond market is the baseline option, which doesn’t necessarily mean we would only buy government bonds.
On the required majority, he said the more Governors standing by this new instrument, the safer you feel that the pros and cons have been weighed in the right way, while adding we need to design a solution in a way that mitigates the concerns of as many people around the table as possible. We have a good precedent with Outright Monetary Transactions.
In other words, the debate is very much on the exact contents of the easing package and its timing, not whether such a package is coming. Pointing to the need to find a solution that suits most governors increases risks that the ECB is not ready with its package already at the January meeting, as well the risks that the package will come in below expectations. However, Draghi will not want to disappoint in these circumstances, especially as there are already doubts about how much more the ECB can do.
Greek drama continuing
The first round of the Greek presidential elections found support of 160 votes for the government candidate vs the 200 needed. The second round will take place on 23 December and the third one most likely on 29 December. 200 votes are needed on the second round as well to elect the president, while 180 will suffice in the third round. In other words, the focus should very much be on the third round, and yesterday’s results should not be taken as any clear guidance on the voting intentions on the third round.
That said, it remains likely that the government will fail to reach the required majority, leading to early elections next year and adding to worries over the future of Greece. One should thus prepare for volatility in the final days of the year.
German Ifo, Philly Fed index and EU Summit ahead
Even though today’s calendar will be no match for yesterday, there are several points of interests in store. In the Euro area, the German Ifo at 10:00 CET is hoped to replicate the increase seen in the composite output PMI earlier in the week. Another 2-day EU Summit to discuss Ukraine, Russia, the EU economy and budgets as well as Mr Juncker’s investment programme will start today. In the UK, November retail sales will be out at 10:30 CET.
In the US, weekly jobless claims will be out at 14:30 CET, December preliminary Markit composite PMI at 15:45 CET and the Philadelphia Fed manufacturing index as well as November leading indicators at 16:00 CET.
Spanish and US issuance
Today will be the busiest day of the week in terms of government bond issuance. Spain will sell bonds maturing in 2019, 2023 and 2024 for a combined EUR 1.5 to 2.5bn. The US, in turn, will offer 5-year TIPS for USD 16bn.
Nordea