Long yields stayed at rock bottom levels yesterday with German Bund yield pretty stable at 0.94%. The Euro area periphery yields continued their way to new all-time lows with the ECB expectations the main theme for now.
Eonia swaps up to two years maturity remained below zero for a second day in a row. The spot rate is still just above zero at 0.009%.With the month end looming, the spot rate is likely to remain positive for now, but the case might be different already next week.
In the US the 10-year yield remained stable at 2.39% even as the US macro data came out above expectations. Also US yields are pressured now by the European developments.
With little scheduled news flow today, markets continue to be driven by the ECB hopes.
No big steps forward in the Ukrainian crisis
As expected no major breakthroughs were accomplished in the meeting between the Russian president Putin and Ukrainian counterpart Poroshenko.
Ukraine promised to work on an urgent ceasefire plan, whereas Russia claimed conditions of a ceasefire are not their business but up to Ukraine itself. Fundamental differences remain and the uncertainty will keep markets choppy for now.
Encouraging US data
The US data was mostly above expectations. Especially consumer confidence and durable goods data were encouraging. However, Case-Shiller home prices were up 8.1% from last year, below the expected 8.4%.
Mostly nice macro data failed to lift bond yields in the US. As the markets need to wait for the next heavy weight US data (NFP) until next week’s Friday, the investors are now concentrated on the ECB speculations.
Another ECB meeting, another disappointment?
The start of the week has been dominated by Draghi’s Jackson Hole speech that succeeded in creating great expectations in the markets. In addition to QE hopes, the market is speculating with additional rate cuts from the ECB.
In ECB’s August meeting Draghi stated that the key ECB interest rates will remain at present levels for an extended period of time in view of the current outlook for inflation.
One could argue that the inflation outlook has changed since then. Lowering rates, however, seems tricky.
By cutting rates now, the ECB could make the case for locking in long TLTRO funding less attractive. If banks were to expect more cuts down the road, why to lock in your funding cost just yet?
As a wide QE-programme seems premature, the ECB seems to be leading the markets to a yet another disappointment. If the ECB does not deliver something big in the next week’s meeting, markets are likely to be disappointed.
Quiet macro day, US continues auctions
Quite a silent day on the macro front today. The US Treasury will sell $35 billion in five-year notes and $13 billion 2-year floating rate notes. Italy issues short-term bills.
Nordea