Long yields finally saw a more sizable upward movement in the US and Germany, while Canadian and UK yields fell on the back of dovish central banks. The Canadian 2-year yield slumped by almost 30 bp. Oil prices continue to show signs of stabilisation. Equity markets ended with small gains on both sides of the Atlantic (though UK equities saw a bigger advance). EUR/USD rose.
The minutes of the January MPC meeting at the Bank of England showed that members unanimously voted for keeping rates unchanged. This was unexpected since two members (Weale and McCafferty) previously voted for a 25 bp rate hike. As a result, we postpone the expected first BoE rate hike from June to Q4 2015.
The Bank of Canada surprised with a 25 bp rate cut, bringing its benchmark rate to 0.75%. The central bank called the move insurance against the potentially destructive effects of the oil price collapse. While the Fed and the BoC historically often have travelled in pairs, we believe divergence will be the case this time. Cheaper crude oil, while good for the US economy, is unequivocally bad for Canada.
In Brazil the central bank went for a 50 bp rate hike to 12.25%, in line with expectations. The central bank statement simply stated the decision was taken in light of the macroeconomic scenario and the inflation outlook. The rate is likely to be hiked further going forward.
ECB QE speculation continued. According to ECB officials, a plan being considered would see the ECB buy roughly EUR 50bn a month, starting in March and lasting for at least a year. We will finally know later today. For more on our expectations, please see below.
Day ahead
Today’s – and potentially this year’s – most important event is the ECB meeting. We expect the central bank to announce an expansion of the types of assets purchased to government, agency and investment grade corporate bonds, with the pace of purchases amounting roughly EUR 50 to 70bn per month, a more aggressive estimate compared to the consensus. We expect the ECB to start buying EUR-denominated government bonds in Q1, according to the capital key, along the curve and including inflation linkers. The ECB is believed to take at least the major part of the risk. Overall, we expect a credible programme, which will build confidence that the central bank eventually meets its inflation target. For more details, see here.
We will release new financial forecasts tomorrow.
In the US, new jobless claims are expected to correct lower to around 300k after last week’s rise, which likely reflected seasonal adjustment difficulties at the start of the new year.
A few hours after midnight the Chinese HSBC/Markit flash manufacturing PMI will be released for January. The consensus forecast is 49.5, trivially down from 49.6 in December.
Rates
The German 10-year yield jumped by 7.5 bp yesterday, leaving the rate at 0.52%. This was the first bigger upward move in the yield this year, and there should be more upside left. The ECB will naturally be the key market mover today.
Intra-Euro-area spreads narrowed yesterday ahead of the ECB. We find spread levels too tight in the semi-core space and expect to see a rebound following the ECB.
Short-end EUR rates have come down and market talk has started to centre around a possible rate cut by the ECB. Read more in EUR Rates: The ECB surely can’t cut the depo. Right?
The UK 10-year yield ended the day lower by 3 bp on the back of dovish BoE minutes, and impressive showing considering the move in US and German yields. Canadian bonds rallied even more, with the 10-year yield down by 5 bp.
The US 10-year yield leapt by more than 8 bp, and has approached the 1.90% level overnight, which still looks low considering how the US economy is doing.
FX
Yesterday’s trading of the USD was characterised by profit-taking and ECB rumours ahead of today’s potentially momentous announcement. On the one hand, the lack of broad-based EUR weakness yesterday despite rumours of a large QE announcement may suggest that a lot is priced in. On the other hand, it may reflect extensive profit-taking. If we are right and the ECB launches a credible programme today, then the bank will not need to take further policy steps undermining the EUR in coming quarters. Price action from the Fed’s QE2 and QE3 announcements suggests that the EUR could start to appreciate after today’s announcement – even though the sceptic would note that there are large differences between these economies, making comparisons difficult.
SEK: the main event today is naturally the ECB, which could pave the way for some strength. SEK strength could in turn pave the way for comments on how this increases the pressure on the Riksbank to deliver more easing, potentially as early as in February. The fact that the SEK is some 3% weaker than the Riksbank predicted in December does, however, imply that the currency could strengthen materially versus the EUR before becoming a game-changing driver of Riksbank policy.
NOK: for the same reason as for the SEK, a big-enough ECB QE announcement could spill over to a stronger NOK today. Overall, oil price developments remain key.
Nordea