Safe haven yields edged clearly lower yesterday as the tensions in Ukraine intensified when Russia put troops on alert near Ukraine. The markets shrugged off the poor German auction and better than expected US home sales, and the 10-year German Bund yield came 4bp down. Bund yield is now at 1.62% and thus at the low end of its recent trading range. In the US the 10-year yield was pressured to 2.67%.
If the situation in Ukraine builds up or the Euro area inflation data tomorrow surprises on the low side, the Bund yield has potential to break the recent trading range and edge considerably lower from these levels. The move would be supported by the market positioning.
No aid from Yellen
Today, however, markets are hoping to hear Yellen deliver some soothing words in her speech to Senate Banking Committee that Fed is following the soft economic figures and prepared to adjust its policy if needed. As we expect the softness in figures to be largely weather related, we don’t expect Fed to alter its policy path. Yellen’s message is likely to reflect the tone in the previous Fed minutes and result in some upside pressure on rates, if just the geopolitical tensions allow it.
Yuan on a two-way street
According to WSJ sources China’s central bank engineered the recent decline in Chinese yuan to curb expectations for one-way appreciation and prepare the currency for wider trading band. Yuan has fallen over 1% against dollar this year. Yuan’s depreciation eased yesterday but has again continued this morning. As China is moving ahead with financial reforms the two-way fluctuation of the currency can become a norm.
Inputs for ECB decision making
In Euro area private sector lending came down substantially last year due to lackluster demand and corporates moving to market funding from traditional bank funding. In the latter part of the year the negative numbers likely reflected the banks getting ready for the ECB orchestrated AQR and stress testing exercises. January figures released today at 10 am CET can provide hints whether the effect is fading. However, even though the lending fall is about to find some support, it will stay subdued for some time.
Flash German HICP is expected today to come out at 1.1% YoY and 0.7% MoM. We have not adjusted our estimate on Euro area inflation after the upward revision on January headline number to 0.8% and expect a low 0.7% figure for February flash HICP inflation for Euro area. Surprise on the low side would put additional pressure on the ECB to act and pressure rates.
Speeches, auctions, rating action
ECB’s Draghi will speak today at 19.30 CET and Praet at 16.30 CET. Elsewhere in the calendar we have European Commission economic sentiment indicator at 11.00 CET and US durable goods orders at 14.30 CET.
Italy taps today 2.5-3.0bn euros with a 5-year bond and issues a new 10-year bond of 3.5-4.0bn euros. Recent positive sentiment around European periphery should support the issuance also today. Portugal intends to buyback 2014 and 2015 bonds. The amount is subject to market conditions. The US auctions 7-year bonds worth 29bn dollars.
Tomorrow we might get some credit rating action in the sovereign space. Moody’s has a chance to give its opinion on ratings of Germany, Austria and Luxembourg, S&P on Belgium and DBRS on EFSF.
Nordea