While you were asleep
Oil prices extended their losses to just above USD 50 (Brent front contract) and so did the EUR versus the USD. 10-year US Treasury yields fell below 2% for the first time since May 2013 on a closing basis, while the German 10-year yield reached a new record low at 0.44% on increased QE speculation.
Without naming sources, a Dutch newspaper reported that the ECB is considering three options for sovereign QE: the ECB buys according to the capital key; the ECB buys only triple A rated bonds; national central banks buy and bear the risk. Unsurprisingly, the ECB declined to comment.
Final PMI numbers for the Euro area came in a bit weaker than expected. Spain is still outperforming, while France and Italy are lagging. In France, however, consumer confidence rose to a 2½-year high. The benefits of low inflation?
The US non-manufacturing ISM weakened more than expected. However, at 56 the employment index remained at a solid level pointing to a healthy increase in payrolls on Friday.
Day ahead
Euro-area inflation data at 11.00 CET will attract a lot of attention today. In line with the consensus, we expect the headline inflation rate to drop to -0.1% y/y, driven by lower energy prices. We see the main forecast risk to the downside. The next couple of inflation rates will likely be negative. This is highly symbolic and increases the pressure on the ECB.
There will also be labour market numbers for Germany and the Euro area.
The minutes of the FOMC’s December meeting are expected to signal that the Fed still sees a first rate hike around mid-2015, in line with the message from the post-meeting statement and Fed Chair Yellen’s press conference.
Rates
Bunds keep gaining on the back of peripheral turmoil (Greece) and sliding oil prices, but this time it was the ultra-long end of the curve driving the action. German rates broke new ground taking the 10-year to record- lows yet again reaching 0.44%. Semi-core 10-year bonds even managed to outperform Germany slightly, but the periphery once again took sizable losses. At 1.64% the Spanish 10-year ended the day higher by around 4bp. The 30-year German benchmark yield plunged by almost 15bp to 1.17%.
The EUR swap curve flattened sharply, with the 30-year point ending at 1.27%, down 13bp from the day before. 10s30s stand at 55 bp, tightening 8bp, which is the largest move since 24 June 2013 in the wake of Bernanke mentioning the QE taper.
The move in rates was seen in a market characterised by low liquidity and no major events. Yesterday’s low liquidity could very well be due to the market awaiting the inflation prints we will be seeing later today (11:.00 CET). These will point to an increasing likelihood of a QE announcement by the ECB later this month, but expectations for the numbers are already low, and we could easily see a rebound higher in yields today.
US Treasury yields collapsed, with the 10-year plummeting below 2%, ending the day at 1.94%, down 9bp for the day (but up from intraday low of 1.89%). Excluding the intraday plunge seen last October, we have to go back to May 2013 to find similar low levels.
Belgium is preparing to launch a new 10-year benchmark, likely today, while Ireland announced its plans for a new 7-year issue. 2015 bond issuance is thus getting into full swing.
FX
EUR/USD failed to break lower yesterday despite disappointing PMI’s (but the cross has made fresh 8-year lows this morning), one reason being a market likely to want to wait until Friday’s non-farm payrolls before extending current (short) positioning. For this reason, even if Euro-area HICP inflation – today’s main event – shows its first negative reading in a good while, this is unlikely to affect the EUR much. Today’s FOMC minutes could be more important, but would need to show a Fed close to softening in order to change prevailing USD-positive and EUR-negative trends. This we find unlikely.
The SEK gained yesterday despite the Swedish bank holiday. After the hubbub in December, the (high) valuation of EUR/SEK make for a somewhat attractive value play, but this is to some extent counteracted by the potential for further easing from the Riksbank in February. Thursday’s minutes from December’s Monetary Policy Update will thus be closely scrutinised regarding clues on what step could be next for the Riksbank. In general, liquidity is scarce and may remain so for another week.
Brent oil prices have continued to drop, pressuring the NOK. This pressure comes via the impact from lower oil prices on the Norwegian economy and in extension on Norges Bank. EUR/NOK is unlikely to break materially lower barring signs of a stabilising oil prices or signs of a shift from Norges Bank (don’t bet on it).
Nordea