Core bond yields edged further down yesterday. The German 10-year yield descended by 1bp to 0.74%, while the fall in the US 10-year yield was roughly as large. Intra-Euro-area spreads narrowed a bit in the semi-core, but widened outside of it.
Soft German inflation data today could easily push core bond yields still a bit lower. Trading volumes will be limited by the US Thanksgiving Day holiday.
Equity markets ended the day with modest moves. The Stoxx 600 was flat, while S&P 500 climbed by 0.28%, leaving it at a new closing high. Asian markets are trading mixed this morning, while Europe is set to open slightly higher.
Juncker’s investment plan to fall short
The European Fund for Strategic Investments presented by Commission President Juncker was largely in line with the details leaked earlier. The goal is to transform EUR 5bn money from the EIB and EUR 16bn of guarantees from the EU budget to an investment package of EUR 315bn by mobilising public and private sources of finance. The goal is to have the fund up and running by mid-2015, and it is expected to run for three years.
The goals of the plan are certainly welcome, but similar schemes have fallen short many times before, and this is likely to be the case this time as well. The big challenge will be to make the investments and the financing terms look sufficiently good to attract private capital. The fund has some potential to support the Euro-area economy, on the margin, but one should not have too high hopes.
Constâncio makes the case for sovereign bond purchases
The ECB Vice-President Constâncio argued sovereign bond purchases would have plenty of easing power. He said the transmission channels of government bond purchases include signalling and influencing inflation expectations, exploring spill-overs resulting from investors using the cash received to buy other assets, including foreign assets with influence on the exchange rate, and finally, the freeing up of space in banks’ balance sheets to increase credit to the real economy. It is therefore not well founded the counter argument that the policy would not be effective on account of already low sovereign yields. The transmission goes well beyond the direct effect on the yields of the purchased securities.
He continued even less valid is the argument that sovereign bond purchases, should these be deemed necessary, would ease the pressure on governments to do structural reforms. It is not the task of a central bank to exert more or less pressure on governments to adopt policies for which they are responsible. This comment is quite interesting after we know e.g. what went on in the background of the SMP purchases, or the terms of the OMTs. He confirmed the sovereign bond purchases would be conducted according to the ECB’s capital key.
On the formation of asset bubbles, Constâncio commented monetary policy cannot address the problems inherent to the financial cycle, especially in the present situation. This is the role of macro-prudential policy with a different set of policy instruments.
His comments clearly suggest the majority of the Governing Council sees potential in government bond purchases, and is ready to back them, though probably not quite yet. Constâncio referred that the ECB would be able to estimate, whether the current measures are enough, during the first quarter. An announcement on government bond purchases is thus not going to be in the cards next week, even though another expansion of the purchases to e.g. corporate bonds could still be on the agenda.
There was also the usual ECB sources story going around yesterday, which suggested the central bank would wait until at least its first meeting of 2015 to consider further policy steps, though it did not exclude action at next week’s meeting. It added that interim policy steps, such as an expansion of the purchases to corporate bonds and EIB & ESM bonds as well as changing the terms of the TLTROs, could be taken before sovereign bond purchases.
More soft inflation data from Germany – Draghi to speak again
The highlight in today’s calendar will be the preliminary November inflation numbers from Germany at 14:00 CET. Soft numbers today should set the scene for another fall in Euro-area inflation tomorrow. Numbers from the states will start flowing in already at 9:00 CET.
Elsewhere in the calendar, the Euro-area October credit growth report will be released at 10:00 CET and the Euro-area Economic Sentiment Indicator at 11:00 CET, while the ECB’s Constâncio will speak at 10:00 CET, Draghi at 12:30 CET and Weidmann at 13:15 CET.
In addition, OPEC will debate cutting its production quotas in Vienna.
On the issuance front, Italy will sell floating-rate notes maturing in 2020 for EUR 1 to 1.5bn, launch a new 5-year benchmark for EUR 3 to 3.5bn and re-open its 10-year benchmark for EUR 1.5 to 2bn.
Nordea