US Treasuries saw a strong rally on Friday, as US wage pressures were nowhere to be seen, equities had a bad day (Stoxx 600 down by 1.29%, S&P 500 losing 0.84%), while oil prices continue to head lower (front contract of Brent at just above USD 49 this morning). EUR/USD has rebounded.
Hourly earnings down 0.2% m/m were a major surprise in the US jobs reports. Strong payrolls (+252k) and a lower unemployment rate (5.6%) support the case for lift-off in rates later this year. We continue to believe that wage pressures are firmer than suggested by the, in our view, poorly measured wage data in the jobs report.
Bloomberg ran a story about ECB staff preparing purchases of investment grade asses to the tune of EUR 500 bn. There was not much news in this story. This volume would be a disappointment for markets. A comparatively low volume might be part of a compromise in the Governing Council, however.
The debate on the merits of QE continues also within the Governing Council. Executive Board member Lautenschläger, unsurprisingly, commented in an interview over the weekend that the risks were not large enough to warrant government bond purchases at this point. Bank of Italy’s Visco talked more favourably of government bond purchases, while Executive Board member Cœuré said the January 22 meeting was an opportunity to announce QE, but not the only opportunity. Earlier, Hansson from the central bank of Estonia said he preferred corporate bond purchases, while he would find including Greek government bonds at this point problematic. Despite the differences of opinion, a programme including also government bonds looks very likely, and such a programme could easily be announced next week.
The rating agency Fitch downgraded Russia by a notch to BBB-, the lowest investment grade rating, while the outlook was still negative. The downgrade reflected the weakened economic outlook on the back of the plunge in oil prices and the rouble as well as Western sanctions. More interesting will be the action by Standard & Poor’s, which has had a negative watch on its BBB- rating since December. A downgrade to junk would be a bigger blow for the Russian economy.
Day/week ahead
It will be a slow start to the week in terms of data. The Fed’s Lockhart will speak on the US economic outlook and the ECB’s Nowotny on monetary policy.
More CPI data are in store this week (US, UK, Sweden). In addition, a lot of second-tier data will be delivered from the US (e.g. retail sales).
It will be a calm data week for the Euro area as well. The market will focus on the latest news from Greece and the looming ECB QE. On Wednesday, it is worth keeping an eye on the European Court of Justice (ECJ), which will issue a legal opinion (not a final ruling) on the ECB’s OMT programme.
In addition, the Q4 corporate earnings season will be set in motion by Alcoa in the US today.
Rates
The German 10-year yield ended Friday down by 2 bp at 0.49%, as weak wage data in the US employment report gave bonds another boost. The time does not seem to be ripe for a bigger move higher in yields, but there should be more room for an upward rebound in the near term.
The periphery in the meantime took quite a beating in the first full week of 2015. The Spanish 10-year yield lost 7 bp to Germany on the day, and the Spanish 10-year yield climbed more than 20 bp last week, ending at 1.72%. Italy was also hit, but slightly less compared to. The moves illustrate investors are having increasing doubts about how much lower yields in the periphery can fall.
The US 10-year yield plunged in the aftermath of the payrolls report, and ended the day lower by 7 bp at around 1.95%. This was clearly a reaction to the disappointing wage inflation figures.
FX
The EUR/USD initially reacted with a small drop after the non-farm payrolls. The USD index popped up, but reversed partly soon after as US interest rate expectations fell. No big news today, and key for the USD this week will be retail sales – a stronger number could support the USD initially, but actually put pressure on the USD in future, as the US current account re-widens on stronger consumption. The EUR/USD should reverse some of last week’s losses. If not, the next level on the downside would be the 2005 lows of 1.1640.
The SEK is still struggling, as the market awaits liquidity coming back this week and the next. The SEK is cheap. No surprise from the CPI expected, thus the SEK should re-gain and the EUR/SEK retest 9.40.
The NOK reversed some of the previous two days’ gains on Friday. With oil prices still struggling, the NOK is finding it hard to rally. Still, an eventless week locally may bring EUR/NOK to below 8.97/.98 in coming days, the recent lows (hit three times); a break below would bring the cross to 8.80 quickly.
The GBP was helped by manufacturing figures on Friday. It will react to the surprise in December inflation, if any, this Tuesday. A sub-1% reading will not be unexpected (as the BoE had priced this in), thus the risks are skewed to an upside surprise, which will be positive for the GBP.
Nordea