Oil prices finally rebounded around USD 3 yesterday, but it would be too soon to call for prices bottoming out, and prices have been sliding lower again overnight. The plunge in copper prices continued (prices down by more than 5%), while volatility was huge. More oil projects were put on hold yesterday due to plunging prices. The German 10-year yield sank to new lows, while EUR/USD hit fresh 9-year lows. Equity prices tumbled on both sides of the Atlantic (Stoxx 600 down by 1.48%, S&P 500 by 0.58%), which marked the fourth consecutive day of losses for US equities.
For those ECB policymakers willing to do “whatever it takes”, yesterday’s legal opinion from the EU Court of Justice could hardly have been better. The Advocate General said the ECB’s OMT measures “in principle” are in line with EU law and gave the central bank large room for discretion. The Advocate General’s opinion is not binding, but the judges usually follow it.
ECB chief Mario Draghi gave some of his most direct comments to date that the bank is ready to buy government bonds. The ECB’s governing council is united in its determination to achieve the bank’s mandate of keeping inflation just below 2%, Draghi said.
US retail sales saw an unexpected broad-based decline in December, which might prompt a modest downward revision to our 3.2% forecast for Q4 GDP growth. Total retail sales dropped 0.9% m/m, only in part due to lower energy prices. Sales excluding autos, gasoline and building materials fell 0.4% m/m after a solid 0.6% increase in November. However, with solid improvements in real wage income and confidence we expect the weakness to be short-lived.
Catalonia will hold early regional elections on 27 September, where pro-independence parties will try to bolster their case for secession. With Spanish national parliamentary elections following soon after the Catalan vote, there will be considerable political uncertainty in Spain towards the end of this year.
In an interview with the Financial Times, Finnish Prime Minister Stubb commented Finland would remain tough in negotiations with Greece, and give a resounding no forgiving the loans. The FT story continues, citing officials involved in the discussions, that Finnish objections were the main reason the Greek programme was extended by only two months, while most Euro-area countries were in favour of a 6-month extension. Elections are ahead also in Finland in April, which will mean that the Finnish government faces pressures to continue to take a hard line in any negotiations with Greece. The looming programme negotiations, when Greece is eventually able to form a government in the coming months, will be very hard, while even the risk of a Greek Euro-area exit has not vanished.
Fed’s Plosser, a well-known hawk, said that because the economy has returned to a more normal footing, monetary policy should follow suit.
The Polish central bank kept rates unchanged as widely expected. The Reserve Bank of India, in turn, surprised with a 25 bp rate cut to 7.75% in an unscheduled meeting this morning. Slowing inflation would leave the central bank more room to cut rates.
Day ahead
Today’s calendar includes US producer prices (PPI), two regional manufacturing surveys and the weekly jobless claims data. In addition,Poland publishes CPI data.
The Philly Fed index is expected to see a further decline in January to still solid levels, while the Empire State index should rebound after an unexpected drop to negative territory in December.
US headline PPI inflation is expected to drop due to the impact of lower energy prices, while the core rate should be roughly unchanged slightly below 2% y/y. The PPI data will help shape expectations ahead of tomorrow’s much more important CPI report.
US initial jobless claims are expected to remain below 300k, a level consistent with non-farm payrolls growth well above the 200k mark
Rates
Bond rally continues unabated. The German 10-year yield plummeted to new lows at 0.42%. The bond market momentum certainly continues to be strong, but a rebound following the ECB’s message next week looks likely. At least a small technical rebound will take place, as the new 10-year benchmark is trading at around 6 bp higher yield compared to the old one.
Intra-Euro-area spreads mostly narrowed further. Especially semi-core spreads look very low already, and are likely to rebound higher on the back of profit-taking around the ECB’s announcement.
The performance in the US was also impressive, as bonds rallied hard following disappointing US retail sales, though yields rebounded from their intraday lows later. The 10-year yield plummeted below the October intraday lows to levels last seen in the first half of 2013. The taper tantrum has now been fully reversed. The 30-year bond yield briefly traded below 2.40%, below the 2012 lows and the lowest on record!
The 5-year inflation expectation 5 years forward fell below 1.50% in the Euro area for the first time.
Heavy bond issuance will continue today with Spanish auctions, while Italy will sell a new 30-year EUR benchmark via syndication.
FX
The USD saw a somewhat volatile session yesterday, strengthening to a 9-year high against the EUR before weakening on the back of a surprisingly lackluster retail sales report. The EUR could see some temporary support after an ECB QE announcement next week, but the USD is likely to remain the cleanest shirt in the G10 FX laundry.
Despite soft comments from Riksbank Governor Ingves yesterday, the SEK remained fairly steady. While the SEK is still fairly cheap, there is a distinct risk that the Riksbank could be forced into unconventional territory. This is likely to hold the SEK back for now.
The NOK strengthened yesterday, arguably helped by the fact that oil prices stopped falling – at least for now. Markets remain illiquid, leading to larger moves than what’s fundamentally motivated. Oil price trends remain crucial.
Nordea