German Bund yield drifted higher to 1.63% after testing its lowest level since July on Thursday. In addition to a technical correction higher after the big drop, the move was driven by the higher than expected Euro area inflation. In the US 10-year Treasury yield edged slightly upwards to 2.66%.
The fall of safe haven yields is likely to continue today with the tensions in Ukraine intensifying. If the situation continues escalating the Bund yield has room to slip downwards towards 1.5%. Equities are pressured today with most of Asia already leading the move downwards. Safe haven demand will push up US dollar.
Situation in Ukraine escalating
The situation in Ukraine continues to escalate with Russian troops more or less openly operating in on the Crimean peninsula in the Ukraine. So far though, no reports of actual fighting but tensions are high as Russian lawmakers backed President Putin’s wish to send troops into Ukraine. At the same time, Ukrainian forces are mobilizing. We do not expect the current crisis to escalate to an all-out-war and markets will revert to look at fundamentals within days or weeks.
Raised outlooks for Germany and Austria
Moody’s raised the outlooks on both Germany’s and Austria’s AAA ratings to stable from negative. Moody’s cites diminished risks for countries in supporting other Euro area countries and the reduced contagion risks. Germany is expected to have balanced fiscal budgets for 2014 and 2015. Austria’s fiscal strength is seen stabilizing.
Check out China’s growth target
In China the annual session of China’s faux parliament is about to start. Beijing is expected to announce its growth target for this year. We expect there is an equal chance that the growth target this year will be lowered to 7.0% as to be kept at 7.5%.
In China the official manufacturing PMI for February came down to 50.2 from the previous 50.5. The final HSBC manufacturing PMI was adjusted slightly higher to 48.5.
The ECB puzzle
Last month situation was too complex for the ECB to take action. This month ECB will have more information to build on.
ECB will release new staff projections including the new 2016 inflation projection somewhere between 1.6-1.7%. The low number would be enough for the ECB to move.
However, the flash estimate of Euro-area HICP inflation in February came out at 0.8% y/y, which is unchanged from the revised January number and a small upside surprise to our expectations and consensus expectations of 0.7%. Core inflation moved up to 1.0%.
Taking into account the recent inflation figures and the somewhat eased money market tensions, markets are most likely left with hoping for more once more. Doing nothing would disappoint the markets and put upside pressure on the rates.
US data likely to stay soft
We get a big bunch of data from the US starting with the ISM on Monday. With the violent weather conditions well known by now, soft numbers will not be a big surprise.
We expect the weather the continue taking its toll and the ISM to continue its drop to 50.5 well below consensus of 52.0. A reading below 50 would increase speculation that Fed might alter its tapering plan.
Most important US reading is however the February payrolls numbers out of Friday. We expect 130k (below consensus) rise in non-farm payrolls in February. However, the longer the weak data continues from the US, the more likely market will start questioning the Fed taper speed.
Auctions on the pipeline
Austria is on the market on Tuesday with 1.2bn euros of bonds maturing in 2018 and 2023. Germany auctions on Wednesday 4bn euros of 5-year bonds. On Thursday Spain will issue bonds maturing in 2017, 2019 and 2024, and France is on the market with 8-, 10- and 13-year bonds targeting 7-8bn euros. On Friday Moody’s can revisit its ratings on Belgium and Netherlands and Fitch on ESM.
Nordea