The massacre in Greek markets continued, with equities plunging by more than 9% (bank equities hammered by more than 25%) and government bond yields surging. This time there were also spill-over effects to other markets (though Stoxx 600 managed to end the day up by 0.10%). Post-Fed market reactions saw US Treasuries rallying hard (10-year yield down by 10 bp), while the dollar rebounded(EUR/USD back below 1.13) and equities tanked (S&P 500 down by 1.35%).
The Fed left all doors open at its meeting yesterday. The central bank voiced new concern about both inflation and global risks, while at the same time upgraded its assessment of US economic growth and the labour market. The Fed maintained its forward guidance, repeating that it can be “patient” in beginning to normalise monetary policy. The reference to patience indicates that the Fed is unlikely to begin raising rates for “at least the next couple of meetings,” according to the December FOMC minutes. The Q4 employment cost index released on Friday will be especially important regarding our call for the first Fed hike in June.
The new Greek government continued to rattle the markets, promising to renegotiate the bailout package, while halting privatizations and pledging to rehire thousands of public-sector workers. However, the prime minister also promised to avoid a “catastrophic clash” with Germany. Greece also seems to block any potential new round of sanctions against Russia. The stance of the new Greek government further illustrates that the negotiations on the terms of the Greek adjustment programme will be very hard, and further disagreements are set to contribute to market volatility also going forward.
The Russian government earmarked USD 20bn to support its ailing economy. Most of the money will used to support the banks; as loan guarantees needed for investments; and to raise pensions. Russia will suffer a deep recession this year, but also has a good deal of reserves that can be used for additional support of the economy.
Norwegian unemployment fell more than expected, but we did not give last month’s weak figure any weight and consequently will not give yesterday’s strong figure any weight. Norges Bank gives most weight to the registered unemployment figure anyway. These figures will be out Friday.
Consumer confidence in Germany was up a bit, while the French numbers were unchanged in January. Coming readings will be more important to assess the impact of the ECB’s big QE package on consumers.
Day ahead
There are no major events on the calendar for today. Preliminary German consumer prices are expected to have turned negative in January, and will give a good indication of the flash Euro-area inflation estimate due tomorrow. We expect a drop in German inflation to -0.2% y/y. Euro-area data releases also include the December credit numbers and the January Economic Sentiment Indicator.
In Sweden, we expect confidence indicators to be largely unchanged in January. Sentiment for the total economy is rather upbeat, indicating healthy GDP growth, see chart. Retail sales surprised strongly on the upside in November. For the important December figures, which weigh heavily in the quarter due to Christmas shopping, we expect a small, temporary, decline over the month but still high growth over the year.
US initial jobless claims and pending home sales will also be released, and Japanese inflation numbers are out during the night. Unchanged rates are widely expected at the monetary policy meetings in Mexico and South Africa.
Rates
Greek yields surged higher, leading to an even steeper inversion of the yield curve, indicating that the market is once again pricing in a possible default. Greek 10-year yields climbed back above the important threshold of 10% after a jump of more than 85bp. Shorter yields rose more, with the 5-year yield rising to above 13% and the 3-year one to more than 16%.
Again in the wake of Greek worries we saw the classic trend of spill-over effects with the periphery up by the most. Spanish and Italian 10-year spreads to Germany widened by 7.9 bp, while Portuguese bonds saw bigger losses. The German 10-year yield ended the day down by 3 bp at 0.35%.
More Greek worries will continue to support German bonds at the expense of other Euro-area countries in the near term. Do note that yesterday’s movements took place in a thin market.
US Treasuries rallied hard post the Fed announcement, as US equities tanked. The curve bull-flattened, and the 10-year yield plummeted by 10 bp to around its lowest level this year. The underlying demand for bonds remains strong.
FX
The USD gained yesterday while the EUR weakened as markets had to reassess the situation in Greece, this time with geopolitics complicating the scenario analysis due to Syriza’s apparent dealings with the Kremlin. Today’s main macro events in the Euro area are the monetary statistics, which should suggest a further, if modest, acceleration of Euro-area activity in coming months. Taken together with the risk of data disappointments in the US, the market could be forced to reassess its USD outlook somewhat and, if so, then potentially in a slightly negative direction.
Of Scandi importance today are Swedish NIER sentiment numbers and retail sales, which may cause some market reaction, unless the market is forced to reassess its inflation outlook. Hence, the price component in various NIER surveys should be scrutinised closely. Elsewhere there are few Scandi triggers.
Nordea