Bonds and equities rallied on both sides of the Atlantic on Friday, as Draghi emphasized the need to act fast and China cut rates (see more below). The German 10-year yield fell by 3bp to 0.77%, its second lowest close, while the drop for the US 10-year yield was of a similar magnitude.
A weak German Ifo has the potential to give bonds another boost early today, but a small rebound higher in core bond yields is likely to be in the cards later in the day. Still, in general the near-term direction for especially European bond yields continues to be down.
Intra-Euro-area bond spreads narrowed, with e.g. Italian and Spanish 10-year spreads vs Germany contracting by some 6bp.
Especially European equity prices jumped: the Stoxx 600 leapt by 2.06% to its highest since September. In the US, S&P 500 reached yet new highs after a 0.52% climb. Asian equity markets are trading up this morning as well, while Europe is set to open close to flat.
Draghi emphasizes the need for quick action
The ECB’s Draghi said on Friday the ECB will do what we must to raise inflation and inflation expectations as fast as possible, as our price stability mandate requires of us. He added, if on its current trajectory our policy is not effective enough to achieve this, or further risks to the inflation outlook materialise, we would step up the pressure and broaden even more the channels through which we intervene, by altering accordingly the size, pace and composition of our purchases.
The basic message was broadly unchanged compared to what Mr Draghi has said before, but the emphasis on lifting inflation and inflation expectations as fast as possible is a clear signal the ECB is preparing to act again soon. More easing measures, including an expansion of the asset purchases announced so far, could easily be in the cards as early as the December meeting.
Vice-President Constâncio, however, said the ECB would have to assess its stimulus programmes in the first quarter of next year, and if they were not contributing to a pace of increase in the balance sheet compatible with the bank’s expectations, other options would have to be considered.
Rate cuts reach China
The People’s Bank of China surprised on Friday by cutting its benchmark 1-year lending rate by 40bp to 5.6% and its 1-year deposit rate by 25bp to 2.75%. The lending rate cut will mostly help large state-owned enterprises, while the deposit rate cut is likely to have little effect in practice. The policy move illustrates growing concerns among Chinese authorities over slowing growth, and suggests the government is still not bold enough to sacrifice growth for reforms.
German Ifo and Euro-area inflation ahead
The week will get a brisk start with the release of the German Ifo index at 10:00 CET today. Another disappointment looks likely to be in the cards. Later in the week, the November Euro-area inflation flash estimate is set to show another fall in inflation on Friday, adding pressure on the ECB to deliver more. European Commission President Juncker, in turn, is set to reveal the details of his EUR 300bn investment programme to the European Parliament on Wednesday.
The US data calendar includes house price data (tomorrow) and October personal spending, durable goods orders, pending home sales as well as the Chicago PMI (on Wednesday). The Thanksgiving Day holiday on Thursday means that the week will be a shortened one.
In addition, the OPEC meeting on Thursday will have consequences for the outlook of the oil price.
Elsewhere in today’s calendar, the preliminary November Markit US composite PMI will be out at 15:45 CET. In addition, the ECB’s Cœuré will speak at 11:00 CET and Weidmann at 14:00 CET, while the ECB will release its latest covered bond purchase data at 15:30 CET.
Plenty of issuance activity
This week’s government bond auction calendar includes action on both sides of the Atlantic. In the Euro area, the Netherlands will re-open its 10-year benchmark for EUR 1.5 to 2.5bn tomorrow, while Germany will tap its 10-year benchmark for EUR 4bn on Wednesday. Italy will sell bonds on Thursday.
In the US, USD 28bn of 2-year notes will be offered already today, USD 13bn of 2-year floating-rate notes and USD 35bn of 5-year notes tomorrow and USD 29bn of 7-year notes on Wednesday.
Nordea