German bonds continued to rally yesterday, with the 10-year yield down another 2bp. US yields, however, ended the day mostly higher (10-year yield up by around a bp). In FX space, EUR/USD was already trading below 1.26 yesterday, before rebounding slightly higher.
Intra-Euro-area spreads mostly narrowed, but Greek bonds took a further hit. The Greek 10-year yield has now jumped by more than 100bp in just a few weeks. Spanish bonds felt some relief, as the Catalan President suspended the referendum campaign in the aftermath of the preliminary ruling by the Constitutional Court.
With the start of a new quarter and in light of the recent fall in yields, core yields are likely to creep higher today. However, geopolitical tensions, like increasing protests in Hong Kong, should keep losses for core bonds contained.
European equities performed some yesterday, but US equities took losses again (S&P 500 down by 0.29%). Asian markets are trading with limited moves this morning, but Europe is set to open lower.
Down we go – once again
Euro-area inflation edged further down from the already subdued 0.4% y/y in August to 0.3% in September, but the bigger surprise was the slump in core inflation (inflation excluding energy, food, alcohol and tobacco) from 0.9% y/y to 0.7%, equalling the cycle low. Continued downside surprises in inflation are certainly troubling for the ECB. Headline inflation should rebound in October due to base effects, but unless the core rate rebounds as well, the central bank will find itself in an increasingly uncomfortable position.
ECB about to relax its credit thresholds further?
The Financial Times reports, citing people familiar with the matter, that the ECB Executive Board would propose also the safer tranches of Greek and Cypriot asset backed securities would be part of the central bank’s purchase programme, even if they carried junk ratings. Such an inclusion would be needed, if the ECB wanted to be able to purchases such securities from all Euro-area countries. However, a more interesting and significant question will be, whether the ECB will buy also the riskier tranches of the ABSs, as there have been reports that at least France and Germany would be reluctant to offer the ECB guarantees as part of such purchases.
New 5-year benchmark from Austria
Austria launched a new EUR 4bn 5-year benchmark yesterday. The bond was priced at 16bp below mid-swaps vs initial price thoughts of 15-16bp below swaps. Books were reported to have totalled in excess of EUR 5.25bn. After this issue, the country has completed around 80% of its funding needs for the year.
Eyes on manufacturing PMIs and ADP employment data
The pace of economic data releases will pick up today, with the highlights the US ADP employment report at 14:15 CET and the US manufacturing ISM index at 16:00 CET. Considering the recent moves lower in yields, bright data could easily push yields a bit higher.
In Europe, final Euro-area September manufacturing PMI data, including the breakdown by country, will be out at 10:00 CET and UK PMI data at 10:30 CET.
On the issuance front, Germany will re-open its 10-year benchmark for EUR 5bn.
Nordea