Bonds rallied again yesterday on both sides of the Atlantic. The German 10-year yield ended the day down by some 1bp at around 80bp, while the 10-year EUR swap rate was trading below 1% and the end-of-the-day level of around 1% was a record low closing. US Treasury yields fell by around 3bp along the curve. Intra-Euro-area spreads widened, but the moves were in general rather small.
Despite yesterday’s gains, yields should have more room to fall today, as Euro-area economic data is unlikely to impress, while geopolitical tensions could easily pick up further during the weekend.
European equities posted a partial recovery, with the Stoxx 600 ending the day up by 0.23%. In the US, S&P 500 was close to flat for the third day in a row (up by 0.05%, though the intraday range was larger). Asian equities are trading mixed this morning, while Europe is set to open close to flat.
Lower inflation expectations, but only slightly
The ECB’s Survey of Professional Forecasters showed inflation expectations falling on all horizons. The two-years-ahead average forecast edged lower from 1.5% to 1.4%, while the longer-run forecast fell from 1.9% to 1.8%. The news was not good for the ECB, but nor was it a big setback. Both numbers merely reversed the 0.1%-point increase seen in Q3. Still, both forecasts equal the lowest seen in the history of the survey, which is worrying.
However, the ECB can find some consolation from the fact that market-implied inflation expectations have rebounded in the past month. E.g. the 5-year inflation 5 years forward, as implied by EUR inflation swaps, has climbed to above 1.85% from a low of close to 1.70% last month. That said, even the latest levels are too low for the ECB’s comfort.
G20 meeting to fall short of targets again
The G20 leaders will gather for a 2-day summit in Australia, starting tomorrow, with the aim of finding ways to boost global growth, strengthening the global banking system and closing tax loopholes for multinational companies. However, no concrete measures on how to boost growth are unlikely to surface, while the focus will probably be stolen by the Ukrainian crisis and the Russian involvement in it. Australian Prime Minister Abbott already accused Russia of trying to recreate lost glories of Tsarism and the Soviet Union.
The Financial Stability Board, in turn, is set to present its plan of how much big banks will need to increase their total loss-absorbing capital.
More weak GDP data from the Euro area ahead
Today is the most interesting day of the week in terms of economic data releases. Euro-area Q3 GDP numbers will struggle to show any growth at 11:00 CET, which would be a disappointment. German numbers will be out already at 8:00 CET, and there is a clear risk the data would put the German economy in another technical recession. Even though from an economic point of view, the direction of an economy is more interesting than whether the development exactly meets the definition of a technical recession, the psychological meaning of a recession would be larger. Italian GDP numbers will be out at 10:00 CET and final October Euro-area inflation at 11:00 CET.
French numbers, just released, showed growth of 0.3% q/q, above the 0.1% expected, while Q2 was revised from flat to a 0.1% contraction. However, after the downward revisions, y/y growth of 0.4% was in line with expectations.
In the US, October retail sales at 14:30 CET will be watched carefully after the clear disappointment in the September data. A rebound should be in the cards. Preliminary November University of Michigan consumer confidence will be released at 15:55 CET.
In addition, EU finance ministers will meet to discuss the EU’s 2015 budget at 10:00 CET, the Fed’s Bullard will speak at 15:10 CET, and the ECB’s Cœuré, the Fed’s Powell as well as Fischer at 22:00 CET.
On the ratings front, Standard & Poor’s has a chance to review its rating on Spain and Fitch on Belgium.
Nordea