Core bond yields initially climbed higher yesterday, but more dovish ECB comments and violence in Ukraine coupled with rumours that Russian forces would have crossed the border spurred demand for bonds again. The result was lower core yields and bull-flattening on the curve on both sides of the Atlantic. In the Euro zone, semi-core countries performed even better than German bonds, with Belgium taking the lead, while Italian and Spanish spreads expanded.
Bonds clearly remain supported in the current market environment, and the near-term upside still looks limited ahead of the expected easing package from the ECB next week. Still, yields are likely to creep slightly higher today after yesterday’s falls.
Ukraine-related news did not spoil the party on equity markets, where more gains were seen, though the moves were not huge. S&P 500 hit a record high again. Asian equities have continued to head higher overnight, pointing to a slightly positive open in Europe as well.
US house prices with more sizable gains – pace of increase to slow
US home prices continued to show big increases in the first quarter of the year. According to the S&P / Case-Shiller index, prices increased by 10.4% y/y in Q1 vs 11.4% in the previous quarter, while the FHFA house price index showed gains of 6.6% y/y. US house prices thus continue to head higher, but the recent increase in the homes available for sale as well as the lagged effects of decreased momentum in the housing market in general suggest that the pace of price increases will slow going forward.
Other US data released yesterday was a bit mixed. The Markit composite PMI jumped from 55.6 to 58.6, the highest in the history of the series since mid-2011, as the services component saw strong gains from 55.0 to 58.4, consumer confidence rose in line with expectations, while the regional manufacturing indices in Richmond and Dallas were somewhat weaker than expected. Overall, the US economy should see good performance over the summer.
Recent rise in Eonia not a huge concern to the ECB
The Eonia overnight rate continued to climb yesterday, hitting 47bp, the highest since the end of the first quarter. However, due to another failed SMP sterilization and higher demand at the ECB’s main refinancing operation, the near-term upside pressure for the overnight rate should subside again. The higher overnight rates have not lifted rates more generally in the short end of the curve, quite the opposite: Eonia swap rates have fallen in anticipation of more action from the ECB. Also the ECB has been pointing out to the fact that the higher volatility in the overnight rate has not led to a notable rise in the pricing of rates further out, implying it has not been overly worried about the risen volatility in the overnight rate. The easing package in store next week is likely to include measures to increase excess liquidity as well, dampening the recent volatility seen in the Eonia.
Euro-zone credit growth not about to pick up
Despite the fact that survey data has pointed to a somewhat brighter outlook regarding back lending, today’s Euro-zone credit numbers for April at 10:00 CET are set to continue to paint a rather grim picture, supporting the case for more easing from the ECB. The May economic sentiment indicator at 11:00 CET will probably also record another small fall. In addition, the ECB will announce the allotment of the latest 3-month refinancing operation at 11:15 CET, while the ECB’s Constâncio will speak at 15:00 CET.
Today’s US calendar looks very light.
Beyond today, tomorrow’s Ascension Day holiday in many parts of Europe will limit market activity.
German, US and Austrian supply ahead
Bond issuance will continue today with Germany, the US and Austria. Germany will re-open its 2046 bond for EUR 2bn. In the US, in turn, USD 13bn of 2-year floating-rate notes and USD 35bn of 5-year bonds will be offered.
Finally, Austria mandated the leads for a new 10-year EUR benchmark yesterday, and the launch is likely to take place today. In addition, Austria announced it would explore the possibility of a 6-year floating rate note.
Nordea