Bonds rallied hard and curves bull-flattened on both sides of the Atlantic, as weak data increased recession fears and boosted expectations of even more accommodative central bank policies ahead (see more below). The German 10-year yield plummeted to record lows of around 0.84%, down 6bp for the day. The corresponding US yield plunged by 8bp to just below 2.20%, while the 30-year Treasury yield bell below 3% for the first time since the first half of 2013.
Intra-Euro-area spreads narrowed mostly a tad in in the semi-core space, but widened outside of it. Greek yields continued to surge higher, with the 10-year yield breaching 7% for the first time in more than six months.
Bond yields are likely to see a small rebound today after the sizable falls lately, and as Mr Draghi will likely refrain from new aggressive easing signals (see more below). In general, however, yields have more room to fall in the near term, and the German 10-year yield will target 0.75% next.
Oil prices continued to plunge. The front contract in Brent crashed to around 85 dollar already. Falling energy prices will further contribute to low inflation prints going forward, but they should be supportive for the economy.
Equity markets finally showed signs of recovery, and European markets ended the day close to flat. In the US, S&P 500 was trading almost 1.3% higher at one point, but could not hold onto to those gains and ended the day only 0.16% higher, a disappointing showing in light of the recent more sizable losses. The equity markets thus continue to feel pressure. Asian markets are trading mostly higher this morning, but Europe is still set to open with some losses.
Forget tightening – bring on more easing
Yesterday’s data package was certainly depressing, even though much of it was of second tier in nature. Inflation numbers surprised notably to the downside in the UK (headline down from 1.5% y/y to 1.2%) and Sweden (CPI -0.4% y/y vs. -0.2% in August), while even French data came in a tad below expectations (national measure 0.3% y/y). Also Chinese September inflation, released this morning, came in below expectations at 1.6% y/y vs 2.0% in August. The lack of inflation is thus clearly not a phenomenon seen only in the Euro-area, and weak price pressures appear to have more global characteristics.
Yesterday’s data was soft also more generally, with the German ZEW index plunging to its lowest in almost two years, and Euro-area industrial production seeing a big contraction.
Such numbers continue to feed the ongoing bond rally, as they lead to more easing expectations (ECB, the Riksbank) or tightening expectations are pushed further into the future (the Fed, BoE). Despite the already low levels, yield should have more room to fall in the near term.
No Catalan referendum for now
Catalan President Mas expectedly called of the independence referendum planned for 9 November, but he is still aiming for some sort of popular consultation to take place on the same day. He is also planning to turn early regional elections into a vote on independence by running on a joint platform with his separatist allies. Yesterday’s news will not remove uncertainty over the issue, and Spanish bonds continue to face risks on the back of Catalan developments, but at least the process will be delayed compared to the more aggressive plans.
Another intervention from Draghi?
The ECB’s Draghi will have a chance to send a dovish message again today, when he will speak in Frankfurt at 9:00 CET (and again at 20:00 CET). He is certainly feeling pressure to do so again: inflation expectations are falling, activity data is plunging and sentiment indicators are plummeting. Draghi will no doubt sound dovish today, but risks are he will stick to repeating the ECB’s willingness to do more without sending new signals, which would probably be a small disappointment and send yields a bit higher. As such a message would not be particularly welcome news for equity markets, weak risk appetite should limit the losses for bonds, however.
Today’s economic data calendar has more activity as well, mainly in the US. September retail sales and PPI will be released at 14:30 CET, along with the New York Fed manufacturing survey, while the Fed’s Beige Book will see daylight at 20:00 CET.
Nordea