Janet Yellen’s bi-annual appearance requires patience. In particular as she yesterday only seemed to be warming up to drop the patience sticker from the FOMC statement. There was no signal as to when exactly the first hike may come, and the market treated the event dovishly and 10Y Treasury yields dropped 10bps. Consequently, we’re back below 2% on the 10y yield.
Reversely, US stocks performed as are their custom on the dovish signals, albeit modestly at around 0.3% for the S&P 500. Similarly, emerging market stocks this morning headed for a three month high based on the lack of firmness from Yellen.
The Greek reform proposals passed the first test although the lack of details and the lack of trust are still evident. We expect parliaments to agree to the bailout extension, but the controversial debate will certainly create headlines. The German Bundestag will vote on Friday.
Euro-area inflation was confirmed at -0.6% y/y for January. Germany, Italy and Spain will release data for February on Friday.
In Denmark the next page was turned on the currency run, and yesterday’s intervention indication was for a close to zero, likely marginally positive outflow of DKK. However, in yesterday’s trading EURDKK went significantly lower again on forwards, an indication that this by no means is over.
The Turkish central bank cut its repo rate by 25 bp to 7.50% and lowered the overnight rate corridor by 50 bp. Analysts, including us, had expected slightly more easing, but the market reaction was fairly muted. More rate cuts are on the cards for the coming months and inflation is coming down fast.
Day ahead
In the absence of major data releases, focus will be on central banks today. The Riksbank’s minutes (9.30 CET) will shed light on the reaction function that has changed again recently with a new focus on lifting inflation expectations quickly.
The US will publish new home sales. Janet Yellen will testify to the House Financial Services Committee which should be “copy and paste” from yesterday’s testimony (16.00 CET).
ECB President Draghi will participate in a plenary debate in the European Parliament (17.30 CET).
Norway will release unemployment numbers at 10.00 CET.
Rates
Strong declines in Greek government yields yesterday as the reform list from the Greek government was dubbed sufficiently comprehensive by the EU Commission. The ECB and the IMF are also on, but according to bulletins far from happy. Greek stocks soared over 7% with single name increases being the highest for banks. It’s looking up, but there are still obstacles.
Indeed, further, on Greece, yesterday saw reports, unconfirmed so far, that the ECB will wait until at least its next policy meeting (5 March) before again allowing Greek banks direct access to funding. The reasoning presumably is that some confidence has to be established regarding the Greek programme extension before the ECB will commit to direct funding. As of now, Greek banks only have access to emergency funding from the national central bank.
In a general positive risk environment, peripheral spreads to German bonds declined so that for example the 10-year Spanish-German spread reached a round 100 bp. The Bund yield increased 1-2 bp on the back of less safe haven flows, but it will have a hard time soaring on a short-term horizon with ECB-QE looming. The Bund spread tightened to 32.5 bp whereas the Buxl spread is now below 20 bp for the first time in a month.
FX
EUR/USD was trading in a narrow range before Yellen’s testimony, in a consolidating triangle which risks breaking out any time – the downside would bring us to new lows (below 1.1098), while the break up would suggest a likely move above 1.1670 (50-day moving average). The upside move will likely be sharper and larger due to positioning. The narrow range continued after Yellen’s testimony, and we’re currently at 1.135. But have no fear, today sees another testimony which may affect the EUR – Draghi’s to the European Parliament.
EUR/SEK is still facing upside pressure, as inflation expectations suggest the Riksbank may not be done just yet. The short-term support for EUR/SEK is around 9.47 – as long as the cross stays above this, the uptrend is intact. The Riksbank’s minutes today may reveal some important details regarding the bank’s intentions: more new measures discussed would be SEK-negative.
The NOK is still trading in lockstep with oil prices, and yesterday it was among the best performing currencies on Brent oil prices edging back toward USD 60/bbl. The pressure should remain on the downside, and once below 8.53, the next target is 8.46 (200-day moving average).