Bond yields dropped yesterday more so in Europe than in the US. The 10-yr Bund yield dropped 5 bps to 1.56% the lowest level since July last year. It is somewhat puzzling that yields drop as rapidly as they do for core-Euro countries but it can hardly be seen as anything other than an indication that many investors have been short duration and are now hurrying to cover that. 2s/10s flatted a full 4 bps but 10s/30s actually steepened 1 bp. US yields dropped 1 bp to 2.64%. Peripheral bonds in Europe continue to be well bid. Greek 10-yr yields dropped below 7% for the first time since 2010.
European equities were under slight selling pressure yesterday but in the US, the S&P 500 closed the day at its highest closing level ever after an increase of about 0.5% as markets saw hope of Fed strategy softening up (see below). Asian equity markets are mixed this morning.
Yellen stays the course… but of course brings in the weatherNew Fed chair Janet Yellen yesterday said in the Senate that Fed will continue its tapering strategy but at the same time acknowledged that the Fed over the coming weeks will try to see how much of the current soft patch in economic key figures is due to the weather and if any of it can be explained by an actual weakening of the economy. Yellen also repeated her desire to take the Fed and investors away from the 6.5% threshold on unemployment for policy changes and to something which is more qualitative, i.e. moving the Fed back to inflation targeting; as long as inflation is low (and expected to stay low), unemployment can go even lower without a change in Fed policy.
Ukraine continues to create headlines
The situation in Ukraine continues to be in flux. In Crimea, unidentified gunmen seized the regional parliament demanding a referendum on the future of Crimea with the not-so-hidden wish that Crimea seeks closer partnership with Russia. Meanwhile, newly elected Ukrainian PM Yatseniuk declared that billions of dollars had been looted from the state coffers by the former administration and immediate help is needed. To top of the day, ousted Ukrainian President Yanukovich send out a message claiming still to be in power. The Ukrainian central bank gave up on trying defending the USD peg and the hryvnia dropped close to 5%. Still, no serious knock-on effect on the rest of Central and Eastern Europe.
Chinese yuan continues to weaken
The Chinese yuan weakened 0.85% close to hitting the intra-day trading band of +/- 1% the People’s Bank of China has set. That brings the yuan to its lowest levels since April last year versus the US dollar. The move follows after last weeks’ announcement by the PBoC that a policy goal for 2014 would be to see an orderly broadening of the trading band and comments from the FX administration body SAFE that two-way moves would be the norm going forward. However, markets cannot help see this as Chinese official trying to weaken the yuan to prop up exports which in turn reflects that the Chinese economy needs help to maintain growth. Add to that, that being long yuan has been a no-brainer which and you have the ingredients for more volatility. Saturday brings the release of official Chinese PMI and the HSBC/Market PMI will be released on Monday.
Today look for Euro-area flash inflation
Today, Euro-area flash inflation for February at 11:00. We expect inflation to come out at 0.7% in line with consensus but risks are skewed on the downside in spite of slightly higher German figures yesterday. Also, the second release of US Q4 GDP figures where markets expect the first release of 3.2% to be revised lower to 2.5%. Finally, Chicago PMI for February at 15:45 which is expected to drop to 56.4 from 59.6. Analysts will probably blame the weather for a softening of the index but at 56.4 it will still be around the 12 months average.
Furthermore, 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