US Treasury yields leapt (10-year yield with a 12 bp jump) and oil prices rebounded (front contract of Brent rising back above USD 50) on Friday, while equities had a positive day as well (S&P 500 up by 1.34%). EUR/USD continued to tumble, trading at one point below 1.15 before rebounding a bit.
Chinese equity prices have plunged this morning, with the Shanghai Composite down by almost 7% at the time of writing, after the Chinese regulator sought to limit margin lending, i.e. buying shares with borrowed money. Yesterday, December data showed Chinesenew home price decline accelerating to 4.3% y/y, the largest drop in the history of the series (data since 2011), according to calculations by Financial Times.
The main surprise in Friday’s US CPI report was weaker-than-expected core prices. However, the flat reading in December seems partly related to the impact of lower energy prices on airline fares, and in addition discounting around the holidays might have dragged down clothing and household furnishing prices. As a result, we see the slowdown in core inflation as only transitory.
Later, the US University of Michigan consumer confidence surged to an 11-year high of 98.2 from 93.6, pointing to strong consumer spending. The fall in gasoline prices is clearly adding to the factors lifting consumer sentiment.
The ECB’s Draghi had briefed German Chancellor Merkel on QE plans, under which national central banks would carry the risks of their own sovereigns, according to the German magazine Spiegel. Such a programme would be a weaker form of QE compared to the ECB’s normal risk sharing framework, and would not be as effective in contributing to narrow intra-Euro-area bond spreads.
Day and week ahead
It is very quiet start to the week today with no major data releases or events. In the US all bond and stock markets are closed as Martin Luther King Jr. Day is celebrated.
Things pick up a few hours after midnight, when China’s Q4 GDP will be released. Both we and the market consensus see growth at 7.2% y/y, which would imply full-year growth of 7.4%. In case we are right, the market reaction should be limited.
Tomorrow also brings the Euro-area bank lending survey and the German ZEW survey. The Turkish central bank will also announce its interest rate decision.
On Wednesday we get the latest Bank of England minutes and the employment report from the UK. In Brazil, we expect the central bank to announce a 50 bp rate hike.
The highlight of the week is obviously the ECB meeting on Thursday when we expect the central bank to announce an expansion of the types of assets purchased to government, agency and investment grade corporate bonds.
Friday sees flash manufacturing and services PMIs for the Euro area, the ECB Survey of Professional Forecasters, the flash US Markit manufacturing PMI plus the flash manufacturing PMI for China.
Finally, Sunday is election day in Greece. Election polls will be published until Friday. Left-wing Syriza is still best positioned to win but unlikely to secure an outright majority in parliament.
Rates
The coming week feels like a make-or-break week for EUR rates. Virtually everyone (us included) expects the ECB to deliver big on Thursday. Just how much will suffice for a credible package in the view of the market is up for debate, see our preview here.
Short EUR rates saw further tumbles to end a tumultuous week. The market is beginning to imply a chance of a depo-rate cut from the ECB, and Euribor fixings dropped 1 bp on Friday, so 3-month is now at 6 bp. This is the lowest ever, and the implied rate for December was on Friday trading at -1 bp. It is also noteworthy that over the past month, the 2-year EUR swap rate has been halved – it is now just 0.12%.
Apart from the front end, Friday saw reasonably steady EUR core rates, while the 30-year swap remains below 1.30%. The German 10-year yield ended the day at 0.45%. Intra-Euro-area bond spreads mainly narrowed.
Friday saw a big rebound in US rates after an extended period of a firm downtrend. The 10-year Treasury yield surged by 12bp, while the 5-year yield jumped by 14bp.
The University of Michigan data delivered longer-term US inflation expectations unchanged at 2.8% (and 1-year at 2.4%). The market implies something much lower than that – about 2% (pulled from the 5Y5Y inflation swap which is at 2.15%).
FX
The EUR continued to weaken last week as markets are in the grip of QE psychology, especially after the surprise move of the Swiss National Bank. There is now evidence of a “QE premium” in various EUR crosses as the currency has weakened more than what is suggested by various financial “fair value” approaches. The EUR is likely to remain under pressure until the dust settles after the ECB announcement on Thursday, after which we may see a bounce as investors start to take profit.
Both the NOK and the SEK have been similarly affected by ECB QE hopes, with NOK also receiving some slight tailwinds from a tentative stabilisation of Brent oil prices.
How ECB QE affects global inflation expectations will be crucial. Enough “money printing” may boost global inflation expectations, reducing the need for further stimulus from Norges Bank and the Riksbank – unless the NOK and the SEK appreciate too much, that is.
Nordea