US-Treasury yields fell by 7 to 10 bp yesterday reacting to the slightly dovish FOMC minutes (10-year Treasury at 2.07%). 10-year Bund yields by contrast rose one bp to 0.38%. The S&P 500 closed virtually unchanged and EUR/USD is trading at 1.1420 while we are typing.
The Fed is stepping up preparations to start normalising monetary policy later this year. However, the FOMC minutes gave no clear indication on the timing of lift-off in rates or how quickly rates will increase after lift-off. On the margin the minutes had a slightly dovish twist as many participants judged that risks facing the US economy argued for keeping interest rates low for a longer time. This supports our September call for the first Fed hike.
The Bank of England is in no hurry to raise policy rates either. The minutes revealed a split in the Monetary Policy Committee on the policy stance longer out. We expect the BoE to start hiking rates in Q4 this year, which is somewhat earlier than the current market pricing.
The latest numbers from the Danish National Bank show that currency reserves still increase rapidly. In our view, the probability of a deposit rate cut has increased.
Day ahead
The Greek government is expected to ask the Eurogroup for a bailout extension today. The tricky question is which conditions Greece is willing to meet and which meaningful concessions the international creditors are willing to make. Not a lot as it seems. There could be a new Eurogroup summit on Friday to finalise the deal. Remember that two recent summits have failed, but all good things might come in threes.
The ECB will publish accounts of the monetary policy meeting held on 21-22 January (13.30 CET). As this is the first time, we don’t know what the report will look like. Will it really increase monetary policy transparency beyond what can be inferred from press conferences and speeches? In any case, the ECB will not publish voting behaviour and who exactly said what during the meetings.
Data-wise it will be a calm day. France will publish inflation numbers. Euro-area consumer confidence should continue on its upward trend. The US provides second-tier data (jobless claims, Philly Fed, leading index).
Rates
Yesterday saw some rebound to UK rates as the BoE minutes revealed that the central bank thought that UK inflation might accelerate quickly on the other side of the immediate deflationary pressure stemming from oil. This lifted the UK swap curve 2-3 bp predominantly in the front.
Range trading in EUR core rates with the Bund yield fairly stable around 38 bp. Unless the Greece situation blows up significantly and even irreversibly, the 10-year yield will have a hard time selling off above the 40 bp that it has been under since the QE announcement. Spill-over from US rates has been close to non-existent with the 10-year spread widening about 40 bp since end-January.
A reasonably steady day for Greek yields yesterday (relative to what the norm been there lately), and the 10-year yield is just below 10% again. Back and forth this will go until some temporary extension is made or Greece in effect will begin the process of leaving the euro.Should the exit chances really surge, big effects can come into play fairly soon and would most likely push Bunds lower, spread-over wider and peripheral versus core spreads wider as well.
In bond supply, France is the primary issuer with auctions in 2017 to 2020 bonds as well as in the 2025 inflation linker.
FX
We see the EUR/USD helped in the short term on signs of a Euro-area recovery, while the Fed rate hike repricing could still help the USD – which will predominate? The result is a range between 1.13 and 1.15.
The GBP was the outperformer among the G10 currencies yesterday following a stellar UK labour market report. Wage growth picking up with the unemployment rate falling is a recipe for a rate hike earlier than the market prices in (now February 2015). But the Euro-area recovery against the political risks likely to grow in the UK before the 7 May election may provide support to EUR/GBP in the near term. Note also that the 0.7300-0.7330 range is a very important technical support level – the lower end of the downward trending wedge since 2008. Should it hold, much more upside in EUR/GBP is likely.
The SEK was among biggest losers yesterday. The perception in the markets lingers that the Riksbank may do more after Prospera inflation expectations for the 5-year horizon stayed low at 1.7% in February. Now the focus will shift to the next quarterly inflation expectations survey (11 March) ahead of the Riksbank meeting in April.
The NOK is still steady, in line with Brent oil prices hovering between USD 60 and USD 62 per barrel this week. The effective NOK is now much closer to Norges Bank’s own projection (less than 1% weaker), but chances are that the strengthening will continue beyond that. EUR/NOK is on track towards 8.46, the 200-day moving average.
Nordea