Janet Yellen debuts
The anticipated showing before congress by Janet Yellen gave way to some impact on US rates. Rates responded upwards upon filtering the initial remarks. Utterings on the likelihood of continuing QE tapering in measured steps with a great deal of continuity were digested as less dovish than anticipated. The trajectory of US key figures has not been good for 2014, especially the two NFPs. The US NFIB small business optimism index yesterday did surprise on the upside however, so maybe the next payroll report will be better.
Yellen’s speech caused Treasuries to sell off and longer swap rates to increase 5-6bps. Along with her assessment of little need for changing the tapering plan, she also foresaw that rates would be near zero well past the time when the jobless rate falls below 6.5%. This gave way to some steepening of the curve, e.g. 2s5s up 3bps.
China value and Kazakhstan devalues.
This morning, positive news from China: Both import and export numbers (10.0% and 10.6% YoY respectively) came in much higher than anticipated, as did the trade balance number with $31.86bn against a consensus estimate of $23.45bn. The immediate effects of these surprises were increases in Asian stocks and a strengthening of South-East Asian and the Aussie currencies.
Meanwhile, somehow vaguely related to Yellen, yesterday saw a devaluation in Kazakhstan, which as the recent one in Argentina, is a reminder of the fragility of the markets in general, and especially in the tapering setting. The mere reduction in expansion looks to cause quite large capital outflows from emerging markets. This is a cause for concern given the general spread compression seen over much of 2013 though no one seriously can expect the US Federal Reserve to conduct monetary policy with explicit reference to emerging markets.
Net drain in EUR liquidity…
EUR rates were still however, except of course the very short end. We jumped the gun a bit yesterday morning, but actual net result from the ECBs liquidity operations and the SMP sterilization was a net drain of 2.5bn from the two liquidity operations and effectively a bit more as the sterilization this time resulted in a full sterilization of the 175.5bn remaining in the SMP program, whereas, on two of the last three occasions, the ECB drained less than the full amount.
The 1W Eonia swap jumped as high as almost 24bps after this, before correcting down a bit to 23bps. Also, the 1M swap got as high as 23bps, which of course should be measured against the ECB price of 25bp. The game is the same: What is unwarranted, and to what extent can market participants themselves ensure the necessary liquidity? Any certainty regarding this is simply not there yet.
… and inflation expectations further down
The potential pressure on the ECB is also on the up from inflation markets where the 5Y EUR inflation swap dipped below 1.20%. The only time in history where we have seen lower readings for this was in late 2008 in the midst of the Lehman-fallout. Further, the 5Y5Y inflation swap rate dropped to 2.14%, to the level of the 31st of January, where the latest flash came) and that of November 2013.
Fairly light key figure calendar today
The numbers for the Eurozone industrial production are likely to see interest. Consensus estimates call for -0.3% m/m and 1.8% YoY. In the US, mortgage applications are out at 13:00 in the UK, Carney presents the quarterly inflation report at 11:30.
On the Scandi side we see GDP numbers from Norway this morning at 10:00. Our economists are forecasting a contraction for Q4 2013 to the amount of -0.5% vs. a consensus estimate of +0.5%.
Today on the EUR side, Italy issues 8bn 1Y bills and Germany targets 8bn Schatz. US to sell 24bn 10Y notes and finally Canada are to issue 30 year bonds.
Nordea