US 10Y Treasury yields edged lower on Yellen’s comments, while the EUR/USD and oil prices were up, and closed above the 60-mark yesterday. Equity markets were marginally down on both sides of the Atlantic.
ECB President Draghi yesterday spoke at the European parliament. He told that the bank stands ready to reinstate the ECB waiver for Greek bonds as soon as it sees the conditions for a successful conclusion of the bailout programme in place. He further commented on the quantitative easing programme, and said it will last until the Governing Council sees a sustained adjustment in the path of inflation consistent with the inflation target.
Before the House Financial Services Committee Fed Chair Yellen repeated the signal from Tuesday that the Fed is becoming . We now see it as close to a 50-50 call between lift-off in rates in June or September.
The Riksbank minutes did not contain much of interest. The overall feeling is that the central bank will not take large steps into deeper negative territory (no 25 bp cuts, instead 10-15 bp cuts). already in April, with a repo rate cut to -0.20% and an extension of the purchase programme to SEK 10bn per quarter until further notice.
Day ahead
Today’s most important data release will probably be the US CPI report. We expect headline inflation to drop to -0.1% in January from 0.8% in December, pulled down by lower energy prices, while the core rate should remain unchanged at 1.6%. Both forecasts are in line with consensus estimates. The continued weak CPI data imply that the Fed is still in no hurry to start hiking rates.
In the US durable goods orders report our focus will as always be on core capital goods orders, a guide to business investment trends. The data are volatile, but after four straight declines they merit watching. The consensus forecast is a 0.3% increase in January. Headline durable goods orders are expected to see a stronger rebound, driven by volatile transportation components.
We expect no revision to UK Q4 GDP, which according to the first estimate increased by 0.7% q/q, equivalent to 2.7% y/y.
Rates
European bond markets saw solid demand during yesterday’s trading session, with the Irish 10-year government bond yield dropping below 1% for the first time and Portugal’s auction of 10-year bonds seeing solid demand. Performance in core markets was, however, even stronger and periphery-core spreads thus widened somewhat in the aftermath of the Greek deal.
The second 3-year LTRO matures today. After yesterday’s EUR 9bn repayment, about EUR 83bn remains. However, a large part will be rolled over into other (shorter) ECB operations. This means that in net terms the second 3-year LTRO maturity will not have a major impact on the liquidity conditions in the Euro area banking system.
In the US, the 10-year Treasury yield has drifted below 2% and all eyes will be set on today’s inflation numbers. As oil prices have picked up somewhat from recent lows, longer market-based inflation expectations have also received a boost. A negative headline number is expected today and this could make the media focus a bit more on this issue in the weeks to come.
In Sweden, the Riksbank will today initiate the SEK 10bn QE programme, as it will buy SEK 3bn in the 5-year benchmark bond (SGB 1047).
FX
EUR/USD has been range-bound for almost a month and this week’s testimonies from Fed chair Yellen have not provided any new impetus. The DXY is at a crucial juncture close to a 50% retracement level from the 2002-2008 drop. The normal pattern of both EUR/USD and the DXY since the 1990s is for the USD to appreciate until the Fed (finally) lifts rates. For an interesting take on what could happen around lift-off, take a look at . That said, in the near term we have little conviction either way, a view seemingly shared by most market participants.
The SEK gained yesterday, helped by an opinion piece by the Riksbank as well as minutes, both of which left the market to conclude that the risk of a big easing move in April is lower than previously thought. The inflation expectations survey due 11 March remains crucial, and there are two schools of thought: those expecting inflation expectations to drop owing to the Riksbank’s so-called crisis rhetoric, and those believing inflation expectations will rise for the same reason. Our call for another rate cut in April suggests EUR/SEK is a buy on dips at these levels.
The NOK stayed range-bound yesterday. Both economic surprise indices as well as oil price momentum have waned recently, which together with the NOK edging closer to Norges Bank’s forecast has provided headwinds for the NOK, especially vs the SEK. NOK/SEK could see some temporary support around 1.0924 (the rising trend line since lows on December 15). MACD is looking increasingly worrisome for NOK bulls, though.
Nordea