here is no end in sight to the fall in oil prices. The front contract of Brent is trading at just above USD 46 this morning, meaning prices have already fallen almost by another 20% since the end of last year. Bond yields continued to fall, while US equities continued under pressure (S&P 500 down by 0.81%).
China’s December trade data beat expectations. Exports grew by 9.7% y/y, up from 4.7% the month before, while the pace of contraction in imports slowed from 6.7% y/y to 2.4%. The monthly data has been rather volatile, but the numbers were a mildly positive signal from the Chinese economy.
Russian CPI inflation increased more than 2 percentage points in December to 11.4%. Inflation is likely to increase in the coming months as the +30% depreciation of the RUB during Q4 feeds through to consumer prices. Higher inflation adds to the pressure on the CBR to hike rates further and is clearly negative for the economy.
Danish inflation is heading lower. CPI inflation dropped to 0.3% y/y in December and will fall further in the coming months, which will be the case in most countries due to the falling oil prices.
Day ahead
Today’s calendar includes inflation numbers for Sweden and the UK as well as the US NFIB index of business confidence in small businesses and the US JOLTS report on the labour market. Moreover, the Fed’s Kocherlakota speaks tonight.
Swedish inflation probably dropped further in December as oil prices plunged. We expect the CPI to have fallen 0.1% m/m (-0.5% y/y) in December and the CPIF to have been flat on the month (0.3% y/y). We see risks as fairly balanced. The drop in oil prices adds to the pressure on the Riksbank to act and fuels market speculation about the potential extraordinary stimulus measures.
The JOLTS report and the NFIB small business survey have both tended to be good leading indicators for wage growth in the past.Both will be scrutinised for signs of a tightening labour market after the surprising drop in wage growth in Friday’s labour market report.
UK CPI inflation will fall below 1.0% y/y in December, in our view. This means that BoE Chief Carney will have to write a letter to the Chancellor of the Exchequer explaining why inflation undershot the bank’s target. Much lower inflation would add to the risks that the BoE will hike later than in June, which is currently our forecast.
Rates
The rebounds in EUR core rates that transpired over the second half of last week are now close to being erased. The German 10-year yield is back below 0.48% and the 30-year EUR swap is back below 1.30% (record close is the 1.27% level from a week ago).
Intra-Euro-area spreads narrowed across the board, reversing the moves from the day before. Even though spread volatility has clearly increased lately, it would be too soon to call the trend of narrowing spreads over.
ECB QE is still the name of the (expectations) game, and Jozef Makuch, the Slovakian member of the Governing Council, yesterday commented on a prospective package being shaped as we speak. Market focus has shifted from if QE comes to what it will look like. Unanimity is unlikely with the German Handelsblatt reporting that although there’s a clear majority in favour of QE, seven ECB council members are against it.
Swaps outperformed Bunds yesterday in large part due to a bulk of swapped issuances going through the swap market. The Bund spread tightened about 2 bp and is now around 26 bp.
As a consequence of most rates being at their all-time lows and the ECB expected to deliver a lot of liquidity going forward, 0% floors on the 3-month Euribor fixing have been priced up significantly. Indeed, breakeven fixings when selling these floors are as low as ‑8 bp. That is low, 15 bp less than the fixing, and even 12 bp less than the lowest implied fixing which currently is 4 bp for September and December 2015. The flow behind this pricing is likely forced hedging of embedded floors rather than expectations of fixings going that low.
US yields headed lower again yesterday, with the 10-year one dropping another 4bp, and has fallen to below 1.90% overnight. The yield is now close to its lowest since the mid-October intra-day plunge. The momentum in the bond market continues to look strong.
Meanwhile, the UK 10-year yield moved below 1.60% again, touching the low point from a week ago. Today’s inflation numbers can, especially with a downside surprise, push these levels down even further.
Portugal is about to launch new 10- and 30-year EUR government bonds. The latter will mark the first time the country ventures into the 30-year sector since its bailout programme, and is thus a good test of the current market appetite for riskier EUR government bonds. There will be plenty of action on the bond auction front as well, with the Netherlands, Italy, Germany, Austria and the US all set to sell bonds.
FX
The USD strengthened yesterday, helped by talk that the ECB will launch QE at its 22 January meeting. A QE programme in January could, counter-intuitively, pave the way for a stabilisation of the EUR. This is after all what occurred in the US after the Fed’s QE2 and QE3 announcements. The Fed’s programmes were regarded as being “big enough”, though. The ECB’s may not be.
The SEK weakened yesterday. The market is increasingly placing its bets on further stimulus from the Riksbank at the 12 February meeting, with a negative repo rate now partly priced in. This is pushing the SEK in a weaker direction. Today’s CPI reading is unlikely to impact either the Riksbank or the market much, given what has happened with energy prices recently.
The NOK weakened as well yesterday as oil prices continued lower. As long as oil prices fail to find a bottom, the NOK will be at risk.
Nordea