European bond yields hit new record lows on a broad front yesterday, as soft inflation data generated yet more expectations of large-scale bond buying by the ECB (see more below). The German 10-year yield plunged to 0.70% after a 3bp fall, the French 10-year yield plummeted below 1%, while the Spanish 10-year yield slipped to less than 1.90%. Intra-Euro-area spreads narrowed across the board, while the curve bull-flattened further. Trading volumes, however, were rather modest, affected by the US holiday.
In EUR government bond markets, we see more potential for Spanish bonds to rally vs Italian ones.
After yesterday’s large moves, another drop in Euro-area inflation is unlikely to feed the bond rally further today. Some profit taking thus looks likely ahead of the weekend, and core yields are likely to rise today.
European equities gained as well, with the Stoxx 600 ending the day higher by 0.35%, closing in on the September highs. Asian markets are trading higher as well this morning, while Europe is set to open close to flat.
OPEC keeps production quotas unchanged – oil prices plunge
The Organization of Petroleum Exporting Countries decided to keep their production ceiling unchanged at 30 million barrels a day, sending oil prices into another tailspin. Brent oil price plunged by a further 5 dollars yesterday, and has continued lower overnight. Prices have seen a huge plunge lately: the current price of below USD 72 compares to more than USD 100 as recently as in September. The currencies of large oil producers, like the Norwegian krone and the Russian ruble were hit further.
Even though the falling oil price is good news for the Euro-area economy, in the near term most focus centres on its effects on the already too low inflation. In other words, rather as seen as a factor primarily contributing to the Euro-area economic recovery, the falling price will add pressure on the ECB via falling inflation and inflation expectations to deliver more easing.
Downside surprises in inflation continuing
Yesterday’s inflation numbers from Germany and Spain were another blow to the ECB. The Spanish EU-harmonized inflation measure fell from -0.2% y/y to -0.5%, equalling the 5-year low seen in August. German numbers, in turn, printed at 0.5%y/y, down from 0.8%.
The latest numbers very much illustrate, why in Draghi’s words there is a must to raise inflation and inflation expectations as fast as possible. On the margin then, yesterday’s inflation numbers add the sense of urgency for the ECB to act again already next week.
Euro-area economic sentiment edges higher
The Euro-area economic sentiment indicator surprised positively by climbing from 100.7 to 100.8. At such a level, the indicator is just above its long-run average, and is pointing to a clear pick-up in growth. Unfortunately, actual growth has been weaker than the indicator has been implying lately.
Among individual countries, confidence rose clearly in Spain and France, while it retreated in Germany and Italy. Among the bigger economies, German and Spanish confidence is at a much higher level compared to France and Italy. Spanish confidence hit a 7-year high in November, while the French sentiment is at its highest since the summer of 2011.
New 5-year lows ahead for Euro-area inflation
Today’s Euro-area inflation flash estimate for November is set to deliver more bad news for the ECB at 11:00 CET. Headline inflation could easily fall to 0.2% y/y, thus more than reversing the modest increase seen in October. However, after the soft data and a further drop in yields yesterday, such a move is unlikely to feed another bond rally.
Elsewhere in the calendar, the ECB’s Costa will speak at 10:30 CET and Weidmann at 12:00 CET. In terms of sovereign ratings, Moody’s has a chance to review its view on Greece (currently Caa1 with a stable outlook).
Nordea