Ahead of the elections in Greece on 25 January, Prime Minister Samaras said yesterday that victory for the main opposition Syriza party – as polls suggest is likely – would result in default and the country’s exit from the Euro area.
The EUR weakened to the lowest level in almost nine years versus the USD amid concern Greece will exit the currency union. Meanwhile, at just above 0.50% the German 10-year bond yield was little changed from Friday’s new record low of 0.49%.
Brent crude oil fell below USD 54 a barrel to new 6-year lows, following news on record supplies from Iraq and Russia, and in line with the drop in stock markets.
German HICP inflation fell from 0.5% in November to 0.1% y/y in December, weaker than the 0.2% consensus estimate. As a result we have revised down our forecast for the December Euro-area HICP to ‑0.1% y/y (released tomorrow). The first negative reading since October 2009 would increase the pressure on the ECB to announce the next phase of policy easing as early as at the policy meeting on 22 January.
Day ahead
Only second-tier economic data will be delivered today. We expect no revisions to the Euro-area composite and services PMIs from the preliminary to final December prints (51.7 and 51.9, respectively).
The December US non-manufacturing headline index is likely to weaken moderately from November’s lofty 59.3 reading. The employment index will be important for expectations ahead of Friday’s employment report.
Rates
The Greek situation is causing traditional safe haven flows to start the year. Despite this, and a weaker German inflation print, Bund yields were up about 2 bp yesterday. The consensus expectation for the EMU flash CPI estimate on Wednesday is -0.1% y/y. The inflation market implies a -0.3% y/y print for the HICPxT (ex tobacco) index.
QE from ECB priced in. The short end (1Y) EURUSD xCcy basis swap went below -19 bp yesterday morning, the lowest value since early 2013, a clear indication of more EUR liquidity (likely via QE) being priced in. Similarly, short-dated Eonia swaps continue to trade very low and the fixing started the year at -7.9 bp.
There’s a conflict in schedules as the ECB convenes on 22 January and the deciding Greek elections are three days later. Surely, the ECB would be hesitant to announce purchases of Greek bonds with the risk of a euro-exit real with a Syriza win on 25 January.
On the EUR swap curve, the 30Y traded below 1.40% yesterday, yet another all-time low. 10s30s is still flat at around 63 bp, and the risk/reward favours a steeper curve on the short horizon.
Renewed further drops in 10-year US yields after Friday’s solid demand for Treasuries and the 10Y point has broken below 2.10%, ending at 2.02% yesterday.
FX
US dollar bull trend continues in line with elevated FX volatility. Breaching the 200-month moving average (1.2233) triggered a panic drop in EUR/USD, taking it to new lows since 2010 of 1.1864. The Grexit talks and a tad lower-than-expected German inflation, paving the way for a likely negative year-on-year EMU inflation print on Wednesday, weigh on the EUR and other European currencies. Another big move is unlikely, however, until the US payrolls report on Friday, and EUR/USD will likely try to retest 1.20, especially if US service ISM disappoints today.
SEK consolidating. EUR/SEK retested 9.50 again yesterday, but momentum seems to be fading and a grind toward 9.40 seems likely as liquidity returns to the market. No big domestic drivers before Friday’s industrial production figures, though.
NOK hurt by further fall in oil price. Brent oil hit new lows – the front month contract traded below USD 54/bbl yesterday – thus bringing the NOK to the worst-performer list. There are no signs of a trend reversal in oil yet, thus EUR/NOK above 9.00 is justified. PMI reported today – always volatile, but could give some support to the NOK today (EUR/NOK towards 9.06) if the consensus proves wrong about the 0.8 point m/m drop in the PMI.
Nordea