Euro-area bonds and equities rallied and the euro tumbled, as the ECB announced a big easing package. The German 10-year yield ended the day down by almost 8 bp, EUR/USD nearly touched 1.13, while the Stoxx 600 jumped by 1.66%. Asian equities are trading higher this morning as well. Oil prices have continued to move largely sideways.
The ECB had the courage to launch quite a bold asset purchase programme. The programme lasting until at least September 2016 equals 11% of Euro-area GDP and entails bond purchases at a monthly pace of EUR 60bn, and it can be extended if inflation remains too low.We find the programme credible and continue to think that as the dust settles, long yields will rebound, and so will semi-core spreads. That said, the general yield level will remain depressed for a long time. We see the lack of risk sharing as a potential long-term problem for the central bank.
The ECB’s decision was naturally surrounded by plenty of controversy, not least within the Governing Council. The ECB’s Nowotny commented he would have wanted to wait longer, warning the ECB had now more or less shot their last wad. In other words, he is saying that if this does not work, there is not much more the ECB can do. Such comments hurt the credibility of the central bank to deliver whatever it takes to tackle deflation risks.
Day ahead
At 10.00 CET, the ECB will publish the results of the survey of professional forecasters. Long-term inflation forecasts might well have moved further away from the ECB’s target, vindicating yesterday’s QE move.
We expect further small increases in the Euro-area manufacturing, service and composite PMIs. A lower oil price and a weaker EUR should help the manufacturing sector in particular. We would warn against reading much into small PMI movements, though. The trend for the coming months should be moderately up.
Also on the agenda: French business climate (8.45 CET) and for the US the Markit manufacturing PMI (15.45 CET) as well as existing home sales (16.00 CET).
Rates
Soon after the start of the ECB meeting yields started falling across the board, and the day ended with sizable gains for bonds (yield falls) with the periphery leading the pack. Portuguese 10-year yields fell close to 20 bp, with Spanish and Italian yields falling 13-13 bp. The German 10-year yield ended the day down by some 8 bp and the curve full-flattened. Intra-Euro-area spreads thus narrowed across the board.
We continue to think the current global rally in bond yields has gone too far, and expect a rebound higher in longer yields in the near term.
EUR inflation expectations rebounded. The 5Y5Y forward inflation expectations, as implied by inflation swaps, rebounded a further 7 bp, and above 1.70% has risen by around 25 bp from the lows earlier this month.
The US was somewhat side-lined in the wake of the major QE event in Europe. The 10-year Treasury yield finally ended the day lower by 1 bp, but was trading at considerably higher levels earlier in the day.
The Danish central bank once again cut the interest rate on certificates of deposit by 15 bp, to -0.35%, while leaving the other rates unchanged. Again, markets had anticipated the move, speculating that the cut earlier this week was too little following the SNB’s move.The result was a flattening of the Danish swap curve.
FX
The EUR/USD cross failed to repeat the QE announcement pattern, “buy on rumour, sell on fact” did not happen. The ECB announcement raised market inflation expectations, hurting the EUR. EUR/USD reached new lows, and on the back of the aggressive ECB markets start speculating about 1.10. The European PMIs today – good news is a chance for the EUR to recover yesterday’s losses. Draghi said yesterday that growth was one of the key reasons for past EUR weakness.
SEK: as expected, the SEK appreciated on the back of the ECB’s QE announcement. Labour market data has also surprised on the upside, and indicators suggest further improvement. Even the Riksbank can’t prevent SEK strength; the SEK is currently 3% weaker than the bank predicted in December.
NOK: the currency gained against EUR, but lost versus the USD yesterday, as the oil price failed to rise. The headwinds should be temporary. The ECB’s easing should push the NOK stronger.
Nordea