The German 10-year yield initially hit new lows at around 66bp, but rebounded a bit later to end the day only marginally lower. US Treasury yields tried to head higher on the back of strong retail sales, but the selling pressure was just not there, and the 10-year yield finally ended the day roughly unchanged. Shorter US yields did rise, with e.g. the 5-year one climbing by almost 5bp.
Intra-Euro-area bond spreads saw mixed development, but Greek yields continued to rise, with the 10-year yield rising above 9% and briefly surpassing the October highs. The Greek worries are thus far from over, but their spill-over to other markets has moderated, for now.
Core bonds are set to remain supported this morning, but some profit taking could emerge later in the day after the clear gains seen this week, taking yields modestly higher. No bigger losses are in sight, though.
Euro-area inflation expectations continue to fall to ever more painful levels for the ECB. The 10-year inflation swap rate plummeted to new lows of around 1.22%, while the 5-year measure 5 years forward is currently around the October lows of just above 1.70%.
Oil prices continued in a familiar direction: down. The front contract of Brent has hit USD 63 this morning.
European equities were flat on an overall level, but the Greek market was hit again, ending more than 7% lower. US equities ended the day up by 0.45%, but this was well short of the intraday highs, suggesting momentum remains far from impressive. Asian markets are trading modestly higher this morning in the aftermath of mixed Chinese data (November retail sales slightly above expectations, while industrial production disappointed). European markets are set to open lower.
Not nearly enough – QE coming
The second ECB targeted longer-term refinancing operation (TLTRO) saw demand of EUR 130bn, meaning banks took only just over half their maximum initial allowance in the first two TLTROs. These numbers will not take the ECB far in reaching its balance sheet target, and broad-based asset purchases are coming early next year. Core bond yields still have a bit more to fall and the euro should feel pressure from the upcoming purchases.
Even though the TLTRO allotment was probably not a big surprise to the ECB any more at this point, the pressure for more easing has been increasing further lately. Oil prices are showing no signs of stabilizing, Euro-area inflation expectations have hit new lows again, while negative inflation numbers are around the corner. Pressure to introduce broad-based asset purchases already at the January meeting have thus increased.
US economy continues to do well – House narrowly passes spending bill
US retail sales offered more evidence of an economy performing well. The control group of retail sales expanded by a strong 0.6% m/m in November following a 0.5% increase in October. In y/y terms, the growth in the control group of sales matched the fastest pace of expansion since 2012.
Meanwhile, the House narrowly passed the USD 1.1 trillion spending bill that would avert a government shutdown. The bill was passed only after hours of wrangling in a vote of 219-206 that divided both the Republican and the Democratic party. The Senate is expected to pass the bill in the near future. To prevent the government shutdown during the passage of the longer-term bill, both chambers passed a two-day stopgap measure yesterday. The difficulties in passing the bill illustrate that the road ahead will not be easy, but political deadlocks are unlikely to hurt the US economy materially in the short term.
Norges Bank cuts, while Russia hikes, due to plunging oil prices
Norges Bank surprised yesterday by cutting its benchmark rate by 25bp to 1.25% due to the uncertain global picture coupled with the plunging oil prices. The bank signalled rates gave further room to fall.
The central bank of Russia, in turn, has reacted quite differently to the recent oil price development. The bank raised its key rate by 100bp to 10.5% yesterday. The key rate has now almost doubled during this year.
Even though key rates moved in opposite directions in Norway and Russia, the market reaction was similar: both the NOK and the RUB continued in free fall.
Euro-area industrial production and possible French downgrade ahead
Today’s data calendar does not have any heavyweight data to offer. Euro-area October industrial production and Q3 employment data will be released at 11:00 CET, US November PPI at 14:30 CET and final November University of Michigan consumer confidence at 15:55 CET.
In addition, the ECB will release the second to last LTRO repayment data for 2014 at 12:00 CET.
On the ratings front, Standard & Poor’s has a chance to review its rating on the UK (AAA, stable) and Fitch on France (AA+, negative watch) and the UK (AA+, stable). Of these, the French rating is the one in jeopardy.
Nordea