After some ups and downs during and following the ECB press conference (see more below), German yields ended the day roughly unchanged. US yields, in turn, climbed following further improvements in labour market data, and the 10-year yield ended the day up by some 4bp. The US 10-year yield has now been heading higher for three weeks, and has risen to its highest level in a month.
Intra-Euro-area spreads saw swings as well yesterday, but spreads finally ended the day narrower, albeit the moves moderated from their intraday extremes. E.g. the Italian 10-year spread to Germany contracted by some 5bp.
German yields are set to open slightly up this morning, and more upward pressure is likely to be in the cards later in the form of US labour market strength despite the already risen expectations.
European equities initially rallied on the ECB’s message, but most of the gains were given away later, and the Stoxx 600 finally ended the day up by only 0.21%. In the US, S&P 500 advanced by 0.38% to end at new record highs. The US equity market thus seems to have regained some momentum, and the trend remains up. Asian equities are also trading mostly higher this morning, and European markets are heading for a positive open as well.
Unlike the moves in many other markets, the blow the ECB’s message delivered to the euro was not even partly reversed, and EUR/USD has sank below 1.24 for the first time in more than two years. A continued slide in the euro would be welcome news, not least for the ECB.
Mario moving closer to the super mode again
Yesterday’s ECB meeting was clearly about trying to build credibility that the ECB stands united after the recent media reports of a revolt inside the Governing Council. The December meeting will be about action again. Draghi repeated time and again the unanimity behind the statement and the preparedness to take further action.
The balance sheet target is now official, as it was brought into the statement, and thus enjoys the backing of the entire Governing Council. Draghi sounded very committed to reaching this target.
As the target is very unlikely to be met with the measures announced so far, while Draghi dropped plenty of hints that the Governing Council was preparing for more easing, another easing package in December, including an expansion of the ECB’s bond purchases to investment grade corporate bonds, looks likely. The easing mode should keep core bond yields anchored at low levels, contribute to narrowing spreads in the Euro-area bond market and keep the euro under pressure.
Greece to remain under watch – more Euro-area policy coordination sought
The Eurogroup head Dijsselbloem said yesterday there was strong support for a precautionary credit line for Greece after the current EFSF programme expires at the end of the year. Such a credit line would come with conditions attached. He added there was a broad understanding that the IMF would continue being involved. Greece’s hopes of a clean exit from its support programmes any time soon were thus dashed further.
Mr Dijsselbloem also noted Euro-area governments need to step up their efforts. More specifically the Euro Summit leaders have asked the presidents of the Commission, the Council, the ECB and the Eurogroup to prepare next steps on better economic governance and to further strengthen the economic governance and coordination in the Eurozone, which is hoped to lead to a clear and coherent package proposal to foster growth, structural reforms and the return of the investments in the euro area. Such a package would be very welcome, as it is clear the ECB’s potential to heal the Euro-area alone is very limited. Unfortunately, so far the commitment for serious structural reforms has been lacking in many countries, while the resulting policy has been far from coordinated due disagreements.
Catalans to vote amid controversy
Catalonia looks set to hold its disputed non-binding consultation on independence on Sunday despite attempts by the Spanish government and the constitutional court to ban it. More interesting than the actual result will be the share of people taking part and the reactions to the vote from both the Spanish and the Catalan governments. Tensions about the matter are unlikely to ease in the near future, which will continue to pose a risk for Spanish government bonds.
Strong US payrolls, but is it enough?
Strong US payrolls growth likely continued in October. In fact, many indicators are already pointing to even stronger payrolls gains, like initial jobless claims (the 4-week moving average hit its lowest level since 2000 yesterday) or the ISM employment indicators. However, market expectations likely lie higher than the 235k consensus estimate, and strong payrolls growth needs to be coupled with signs of wage growth picking up for the numbers to do more sizable damage to bonds. The US employment report will be released at 14:30 CET.
Central bank speeches will continue to gather attention, and on that front the main focus will be on Yellen’s appearance at 16:15 CET, including a Q&A. In addition, the BoE’s Carney will speak at 11:15 CET, the Fed’s Evans at 15:15 CET and Tarullo at 20:30 CET, while the ECB’s Cœuré is set to give comments at 16:15 CET.
Elsewhere in the calendar, German September industrial production will be released at 8:00 CET, French production at 8:45 CET and Spanish data at 9:00 CET.
On the rating front, Moody’s has a chance to review its ratings on the EU and Belgium, Standard & Poor’s on Portugal and DBRS on France and Finland.
Nordea