Core bonds rebounded yesterday after sizable losses last week. The German 10-year yield edged lower by some 1.5bp, while the US 10-year yield retreated by 2bp. Intra-Euro-area spreads felt more widening pressure.
Bonds are set to perform some more today, as the rise in yields seen last week coupled with yesterday’s stabilization will attract new buying.
Equity markets ended yesterday mostly lower on both sides of the Atlantic, but the moves were very limited in general. Asian markets are trading mostly lower this morning, but Europe is set to open slightly higher.
Inflation expectations creeping lower again – Draghi watching closely
The 5-year inflation expectation 5 years forward, the measure Draghi made clear the ECB is watching very closely, has been creeping lower again. This measure hit 1.96% yesterday, only a couple of basis points higher than the low seen before Draghi’s Jackson Hole speech and almost 10bp lower than after the ECB’s September easing package was announced. Draghi will not be happy with these moves, which do not illustrate confidence that the ECB’s measures would lift inflation even in the medium term. A further fall in inflation expectations would add more pressure on the ECB to do even more to keep expectations anchored.
Finnish government to suffer another blow
The Greens are set to leave the Finnish government coalition later this week as a result of disagreements over a permit to build a new nuclear power plant. Such an outcome has been expected for many months already, but it will be another blow for the Finnish government. If the Greens leave, the government parties will have only 102 members (in practice only 101 voting members) in the 200-strong parliament, which will make passing legislation increasingly tricky, though not impossible.
The weak majority will further support expectations that the most one can expect from the current government is carrying out the proposals set under the previous Prime Minister, while even this may prove too hard. New reforms will have to wait until after the elections next spring. Increased political uncertainty is certainly not welcome at a point, where the economy is already in a bad shape, and should be bad news for Finnish bonds. However, the market moves are likely to remain limited, as turns in Finnish politics have not typically been a big driver of Finnish bonds.
UK CPI and the German ZEW index ahead
The most important events for this week will have to wait until tomorrow and Thursday, so one has to settle for the UK August CPI at 10:30 CET, the German ZEW at 11:00 CET and the US August PPI at 14:30 CET today. In addition, the ECB’s Liikanen will speak at 10:00 CET, while in France, the government faces a confidence vote at 16:00 CET.
Nordea