While you were asleep
Oil prices (Brent front contract) briefly fell below USD 50/bbl for the first time since 2009, but subsequently rebounded to above USD 51/bbl, EUR/USD continued to fall, while equity prices and bond yields rose.
The minutes of the 16-17 December FOMC meeting showed the Fed is unlikely to begin the normalization process for at least the next couple of meetings, but confirmed the Fed is still serious about raising rates later this year. The minutes suggest that the Fed would be willing to raise rates even if inflation remains well below target, as long as the central bank was confident that inflation was on course to get there eventually. We continue to expect the first hike in the June meeting.
The ADP employment report surprised positively with an increase in private-sector employment of 241k in December, which could add to expectations of another strong labour market report on Friday (our preview).
Negative Euro-area inflation is here to stay for a while. Consumer prices dropped 0.2% y/y in December. Core inflation increased a tad to 0.8% y/y, while lower energy prices were the main reason for the drop in the headline. Yesterday’s print increases the risk that ECB QE could be announced as early as 22 January.
An armed assault in Paris, claiming 12 lives, put modest pressure on French government bonds, but did not hurt the equity market or create more general flight-to-safety flows.
Day ahead
A number of important events are due today. The Bank of England will announce interest rates, Sweden’s Riksbank will release minutes and Chinese price indicators will be released tonight.
Bank of England on hold. If we are right there will be no statement and no press conference. MPC members Weale and McCafferty are likely to continue voting for a hike, but that information will not be made public until the minutes are released. Our forecast is that the BoE will start to hike rates in June 2015.
The Riksbank emphasised in December that it is ready to take further actions if necessary. On unconventional measures the bank stated:“Such measures, were they necessary, could be presented at the next monetary policy meeting.” In today’s minutes we will look for hints of which measures that could come. At the press conference, Governor Ingves listed the following options (not ranked in any order): 1. purchases of securities 2. loans to banks 3. negative repo rate 4. currency intervention.
Chinese inflation will be released tonight. We expect CPI inflation to have remained roughly unchanged in December, while producer price “deflation” is likely to have continued due to lower oil prices and persistent overcapacity in certain sectors.
Rates
The 10-30-year curve initially continued to flatten, but the moves were reversed later and the EUR swap curve ended the day 2 bp steeper.
After another sizable move lower early this year, the German 10-year yield finally showed some signs of stabilisation. The yield rebounded despite soft inflation data, implying expectations were already very low. The German 10-year yield ended the day up by 4 bp and should have more room to rise in the coming days.
Inflation expectations ended the day mostly modestly higher despite the first negative Euro-area y/y inflation print since 2009. Still, the market is pricing in average inflation of less than 0.45% in the next five years, while the 5-year measure 5 years forward is below 1.60%.
US Treasury yields rebounded as well (10-year yield up by 3 bp), but at around 2% the 10-year yield remains around 100 bp lower compared to early last year. Long US yields are set to head higher as well in the coming days.
Belgium and Ireland launched new bonds yesterday with good demand. Spain and France will sell bonds today.
Greek 10-year yield surpassed 10% for the first time since 2013. The yield is likely to rise further in the near future. Intra-Euro-area spreads mostly narrowed modestly.
FX
Another day with a stronger USD yesterday and the EUR/USD cross fell to new lows since 2006 (1.1802). The market is looking at 1.1640, the 2005 lows. Recent developments suggest EUR/USD going up when stocks drop more often than not, and vice versa, which may be due to positioning. This is important ahead of Friday’s US payrolls report – if really positive for stocks, could be negative for EUR/USD.
EUR/SEK has continued to try to move lower, but with limited success. With political premiums being priced out, the markets will likely focus on the Riksbank, with the December minutes today being the first to consider. Ultimately the US payrolls on Friday will matter more – and with our baseline of a slightly lower number, there should be room for EUR/SEK to go back to 9.35, the trendline from October.
The NOK got a bit of support yesterday, as Brent oil prices recovered a bit. It is still early to call a trend reversal, but we could see higher oil prices for another day or two, helping EUR/NOK decline towards 9.00.