German yields edged modestly higher yesterday, but US yields continued to fall. The US 10-year yield has descended for four days in a row, though the moves have been quite moderate and have only reversed roughly half of the increase seen last Thursday. Intra-Euro-zone spreads widened some outside the semi-core.
Bonds should remain supported today, and yields continue to trade with a downward bias.
The Eonia overnight rate continued to climb, hitting 29bp already and illustrating tightening liquidity conditions. The renewed tensions will put more focus on today’s LTRO repayment numbers (see more below).
Equity markets mostly had a mildly positive day yesterday. S&P 500 squeezed a gain of 0.17%. However, Asian equities are trading mostly lower this morning, and European equities are set to open modestly lower.
Early this morning, Standard & Poor’s lowered its rating on Russia from BBB to BBB- with a negative outlook. The next step would thus be a downgrade to junk, which would carry bigger significance for Russia. Fitch, in turn, raised the outlook on its Italian BBB+ rating from negative to stable.
Draghi spells out policy options – threshold for further easing not great
The ECB’s Draghi clarified yesterday how the ECB would react in different scenarios requiring more monetary stimulus. More specifically, an unwarranted tightening of monetary policy stance (from developments in short-term money markets, global bond markets or foreign exchange markets) could be tackled through more conventional measures (which include further lowering of the interest rate corridor, including a negative deposit rate, further extension of fixed-rate full allotment procedure and new liquidity injections, including longer-term fixed-rate operations). Second, a further impairment in the transmission of our stance, in particular via the bank lending channel, could be tackled with a targeted LTRO or an ABS purchase programme. Third, a worsening of the medium-term outlook for inflation would warrant a more broad-based asset purchase programme.
Draghi thus wants to be as clear as possible on the ECB’s probable reaction to different courses of events, and tries to convey a message that the ECB is fully prepared to take further action. That said, naturally he did not give any explicit triggers, leaving plenty of room for speculation about the ECB’s next moves. Looking at the short term, i.e. the next few meetings, the conventional measures are likely the ones under more serious consideration, and the threshold for further action does not appear to be particularly large. For broad-based asset purchases, in turn, the threshold remains rather high.
Improving German confidence old news – Spanish GDP growth picks up
The German Ifo index rose from 110.7 to 111.2, above the consensus estimate of 110.4, but coming after earlier positive PMI numbers was no big surprise. The advance was driven by a rebound in the expectations index, which took back roughly half of the drop seen in March. In other words, expectations are still lower compared to the levels seen early this year, but remain at a rather good level historically seen.
Bank of Spain, in turn, estimated that Spanish GDP expanded by 0.4% q/q in the first quarter of the year, the best rate of expansion in more than five years. The numbers further illustrate all the progress Spain has already made in reforming its economy.
Yesterday’s numbers are further signs that the Euro-zone economy is picking up momentum. However, it will be next week’s inflation numbers that are more crucial in determining ECB easing expectations and thus the near-term course for markets.
Denmark scraps negative policy rates
The Danish central bank surprisingly lifted its deposit date from -10bp to 5bp yesterday, ending the period of negative deposit rates since the summer of 2012. Interestingly, the Nationalbanken brought its deposit rate into positive territory (and above the ECB’s deposit rate) at the same time as the ECB has become even more serious in its contemplations of lowering its deposit rate into negative territory. The Danish move was prompted by FX considerations to boost the Danish currency, and the pressure for an opposite move may yet arise, if the ECB cuts its rates further.
US consumer confidence and LTRO repayment data ahead
Today’s calendar looks very light. UK March retail sales will be released at 10:30 CET, the ECB will reveal the latest 3-year LTRO repayment data at 12:00 CET, while final April University of Michigan consumer confidence numbers will see daylight at 15:55 CET. In addition, the ECB’s Knot will speak at 16:30 CET.
Nordea