Oil prices were falling again yesterday, but have not made new lows in more than a week, i.e. are showing tentative signs of stabilising.In long yields and EUR/USD, the trend is still pointing down. European equities rose yesterday, while the gains were more modest in the US. Chinese equities, in turn, have continued to rebound this morning after Monday’s plunge.
Euro area: increasing loan demand. The ECB’s bank lending survey revealed that loan demand by enterprises rose significantly in the last quarter of 2014, giving support to a pick-up in lending to enterprises going forward. Credit standards continued to be eased. These are clearly positive signs amidst all the gloom, but the pressure on ECB to deliver something substantial is still there.
In his State of the Union speech, Mr Obama called for middle-class economics, including expanded child-care benefits, free community college and paid sick leave, proposing to fund such ideas with higher taxes. As the Republicans very much oppose raising taxed, and control both chambers of Congress, those ideas have little chance of passing. That does not mean the current setup in US politics would prevent any decisions from being taken, as the two sides are much closer to each other e.g. on issues of foreign trade agreements.
Heated QE discussions continue in the Euro area. Former ECB Governing Council member Orphanides argued that the idea of leaving national central banks responsible for the risks of their own sovereign bonds in connection with ECB QE would violate the EU treaty. He has a good point, as it is hard to see how such an approach would be consistent with the principles of single monetary policy. Still, ECB QE is also about finding compromises between many differing views, meaning that the eventual programme is unlikely to be the most efficient one.
Turkey: 50 bp rate cut. The Turkish central bank cut its repo rate by 50 bp to 7.75% in a slightly surprising move. Only “slightly” after President Erdogan last week called on the CBT to start cutting interest rates. Before Erdogan’s comments it would have been a much bigger surprise.
The Bank of Japan maintained its target to increase the monetary base, but expanded its loan facilities. The new measures are quite modest, but illustrate the bank is still trying to find the most efficient composition of easing to reach its inflation target, something that will not be easy.
Day ahead
Today’s most important event is the release of the minutes of the December MPC meeting at the Bank of England. Moreover, the Brazilian central bank is expected to hike rates by 50 bp tonight, while December housing starts and building permits will be released in the US.
The Bank of England most likely kept the bank rate unchanged with the votes of all but two members in favour. We believe the most interesting thing in the minutes will be the inflation outlook. Particularly how the members see the effects of the sharp drop in oil prices and wage growth. More dovish tones would makes us change our forecast of the timing of the first rate hike to later this year.
Rates
The German 10-year yield posted a modest rebound (up by 1 bp), helped by the positive German ZEW index. Still, at around 0.45%, the level remains close to record lows and cannot be described as anything but very subdued. There is more room for a rebound higher in the aftermath of the ECB’s easing announcement tomorrow, assuming the central bank reveals a credible easing package.
The US 10-year yield, in turn, fell back below 1.80%, some 40 bp below end-2014 levels and around 5bp lower compared to Monday. The yield has been heading lower since end-2013, illustrating strong demand for bonds despite the improved US economic outlook.
Spain launched a huge EUR 9bn 10-year EUR benchmark on the back of a massive EUR 23bn order book. The issue is a clear illustration Spanish bonds are still finding strong demand at current yield levels, albeit with significant help from expectations that also the ECB will soon enter the market. Today, Germany will auction a new 5-year benchmark with a zero coupon.
FX
EUR/USD fell back to below 1.16 yesterday. Better-than-expected news from the Euro area (ZEW, lending survey) failed to lift the EUR, as few are willing to take risk ahead of the ECB meeting on Thursday. The range should remain narrow for EUR/USD until then, with 1.16 being the anchor.
The NOK and the SEK changed little yesterday, as the currencies are flow rather than news driven. The rise in oil prices has stalled, thus giving no further impetus for the NOK. Both the NOK and the SEK should gain on ECB QE.
The GBP was among the outperformers yesterday, and it could gain more should the news – earnings growth in particular – surprise positively today, increasing the chances of the BoE hiking rates later this year (rather than mid-2016 as the market expects).
Nordea