Wednesday’s FOMC meeting continues to cast a shadow over rate markets yesterday. The tilt towards a more hawkish stance amongst economists was not fulfilled, and bonds saw further gains in yesterday’s trading. The takeaways were highly contributory to rate drops in the Eurozone as well, and as excess liquidity in the Eurozone was boosted, negative fixings became a reality. In more sense than one, a dovish Fed is worse for the Eurozone that for the US. The drop in EURUSD from just under 1.4 to just over 1.35 recently was good news for the ECB. Now the trend has reversed (1.3625 this morning) and that looks troublesome for e.g. Eurozone inflation expectations.
Yesterday, decent data from the US with job claims marginally down and the Philly Fed Business outlook up to 17.8 against a consensus over 14. Today, the data-flow is thin, the highlights being EU consumer confidence and Canadian CPI numbers.
As stocks record highs (S&P 500 with a new global high yesterday) and rates drop, implied vols drop. The VIX index dipped further yesterday to a new post-2007 low at 10.61. In much the same vein, swaption volatility drops again as well. Some quotes here were bid up over the past week in anticipation of a hawkish Fed, but some of that is being reversed along with the drops in rates.
Deflation: Just for doom-sayers?
The ECB has said it, and yesterday German Finance Minister Wolfgang Schaeuble repeated it: Deflation is not a concern in the Eurozone. However, consider: 0.44, 0.46, 0.47, 0.46 – those are the next 4 implied HICPxT fixings in the inflation swap market, with some banks forecasting 0.2 for August. Technically not deflation no, but certainly cause for worry on the short horizon. Even with many nominal rates at or very near all-time lows, downside surprises to these expectations could break rates even lower. June’s flash estimate for headline and core inflation is out on June 30th and will be monitored with high concentration.
EUR swap rates back at all-time lows
Dovish Fed meant lower rates on both sides of the Atlantic, though US rates rebounded in the afternoon. For EUR swaps this meant a new record low for the 5Y swap to 67bps and a renewed flattening of 2s5s on that curve. On the US side, Treasuries reversed a bit of Wednesday’s selloff (fueled by Philly Fed) so that we now see 10Y treasury rate now in 2.61%.
Overnight fixes below zero
The EUR LIBOR O/N rate yesterday fixed below zero for the first time in history and Eonia set a new record low just above zero with 1bp. Excess liquidity has been boosted from the stop to SMP sterilization by the boost got diminished by a roughly €40bn drain in the most recent MRO. Consequently, the period with extremely low or even negative Eonia fixings may well be short lived, and forward Eonia swaps such as 6M6M and 6M3M has corrected up slightly recently.
French auctions went well yesterday, today the UK with bills
The French auctions yesterday went well and had a good build-up as well before the auction. The new Nov19 OAT was allotted at an average of 99.02, 4 cents above the market level and at the same time displaying strong bid-to-covers (2.41 for Nov16 OAT and 2 for Nov19 OAT). Today the supply comes short from the UK with auctions in 28, 91 and 182 day Bills for a total of £3.5bn.
Nordea