US Treasuries rallied (10-year yield down by 6 bp), while the EUR/USD and oil prices fell yesterday. In Europe, the Stoxx 600 equity index hit new 7-year highs after a 0.74% climb, while intra-Euro-area spreads narrowed clearly in the aftermath of the preliminary agreement on Greece.
The presentation of the first list of Greek reforms was delayed from yesterday’s original deadline to this morning, while the Eurogroup is set to discuss the details in a teleconference in the afternoon. At this point, it should not come as any surprise that there are yet more delays in the process. Even though progress is likely to be made in small steps, the road ahead will be hard, and more delays are likely. In fact, there have already been signs of cracks within the Greek government.
In Germany the Ifo index fell short of expectations, increasing by a modest 0.1 index point. Expectations increased and continue to point towards a positive outlook for the German economy.
US existing home sales slumped by a disappointing 4.9% m/m, in January, leaving sales at a 9-month low. The drop should not have come totally out of the blue, as the pending home sales index saw a clear drop in December, but the latest numbers underline the bumpy nature of the housing market recovery.
Day ahead
The main focus of today will be on the US, where Fed Chair Yellen presents her semi-annual monetary policy testimony to Congress today and tomorrow. If Yellen would like to start shifting the rhetoric that has pointed to a first rate hike around mid-year towards a later date for lift-off, this may be the forum. We expect Yellen to repeat that the Fed will be “patient” before raising rates, and we continue to look for the first rate hike in September. In the US we will also get data on Case-Shiller home prices and the Conference Board’s consumer confidence survey today.
From the Euro area, we get French business climate (at 8.45 CET) that should at least remain stable. Furthermore, we get final Euro-area inflation numbers for January (11.00 CET) and expect the flash estimate to be confirmed (headline rate at -0.6% y/y). Germany publishes the GDP breakdown for Q4.
The Turkish central bank (CBRT) may cut its key rate by 50 bp at its monetary policy meeting today and at the same time lower the corridor by 50-75 bp. The political pressure to cut rates is massive and inflation is coming down relatively fast.
Rates
German yields tried once more to head higher, but the 10-year yield met resistance at just below 40 bp and fell later from its intraday highs to end the day roughly unchanged. The 30-year yield was trading at more than 5 bp higher compared to Friday at one point, but retreated clearly from those levels towards the evening. In the bigger picture, the German 10-year yield has been largely trading in a rangebetween 30 bp and 40 bp since late January. Swap rates saw rather clear falls vs German government yields yesterday.
Intra-Euro-area spreads narrowed clearly in the aftermath of the initial agreement between Greece and the Eurogroup. E.g. Spanish and Italian 10-year spreads versus Germany contracted by some 8 bp, while the Greek 10-year yield fell below 9%. Upcoming ECB bond purchases continue to support spread narrowing.
The US 10-year yield has now clearly stabilised above 2% despite yesterday’s 6 bp drop to around 2.06%. The Fed’s cautious stance has more often than not ended up being supportive of bonds, as markets have interpreted the Fed’s comments dovishly. That is likely to be the name of the game also today in response to Fed Chair Yellen’s testimony.
In today’s bond issuance, Italy will sell 2-year zero-coupon bonds and 11-year inflation linkers, while 2-year notes will be offered in the US.
FX
EUR/USD has been trading in a fairly narrow range throughout most of February, consolidating after the big swoon at the start of the year. The USD has been surprisingly resilient despite profit-taking after ECB QE and a plunge in the US economic surprise index. The USD needs more kindling if it is to resume its uptrend. Today’s Humphrey-Hawkins testimony will be of key interest for the USD: will Yellen toughen up her rhetoric versus the slightly dovish tinge of the January minutes?
EUR/SEK remains in “buy-on-dip” mode as the market leans towards further stimulus from the Riksbank later this year. Inflation and inflation expectations remain crucial. Tomorrow’s Riksbank minutes will probably make for interesting reading.
The NOK was once more inspired by the oil price yesterday, which paved the way for a move higher in EUR/NOK after Brent dropped below USD 60 per barrel on renewed supply worries. EUR/NOK has recently found support at the 2014 lows around 8.53, below which the next target is 8.46 (200-day moving average).
Nordea