As expected, yesterday’s ECB meeting provided a lot of QE details. The most important were: QE starts Monday, the Eurosystem will not buy bonds with yields below the deposit rate (-0.2%), securities with a remaining maturity of minimum 2 years and less than 31 years are eligible for purchase, and all purchases will be done in the secondary market. The ECB gave no duration target and no explicit intentions of where on the curve to buy. Highly important as well, the marketable debt instruments bought will be made available for repo purposes.
As widely expected, the Bank of England marked the sixth anniversary of its cutting interest rates to a record low by keeping them on holdonce again. Also the asset purchase programme was unchanged. We continue to expect the first BoE rate hike in Q4 2015, somewhat earlier than what is currently priced in.
In the US, initial jobless claims unexpectedly rose to the highest level in nine months (320k). However, snowfall in part of the country may have caused some temporary dismissals, leading to the increase in filings. The jump in Q4 unit labour costs should add to the Fed’s confidence that inflation over time will move back to 2%.
Day ahead
Today’s by far most important event will be the US labour market report. However, we will also keep an eye on German industrial production numbers.
We expect a 250k rise in non-farm payrolls in February, roughly in line with the strong 257k gain in January. The consensus forecast is a 235k increase in payrolls with a standard deviation of 27k, so anything between 210k and 260k should not be a major surprise.
The key uncertain factor is to what extent bad weather played a role. A snowstorm did occur during the February reference week, but because it was relatively small we expect only a limited impact on payrolls. But we cannot be sure, of course.
We expect the unemployment rate to fall to 5.6% and see a 0.2% m/m rise in average hourly earnings after January’s unexpected 0.5% increase.
We expect German industrial production to rise by 0.5% m/m despite yesterday’s steep fall in (volatile) new orders. The Euro area will publish revised and detailed GDP numbers for Q4.
Rates
The German 10-year yield initially headed higher for the fifth day in a row yesterday, but slumped as the ECB effectively limited its purchases of short German bonds, which would mean more longer-term purchases. The yield finally ended the day lower by around 4 bp, while the 2-year yield rose a touch. The curve thus flattened. We see some upside potential for the German 10-year in the near term, as the start of the ECB’s purchases could easily trigger some profit-taking next week.
Intra-Euro-area bond spreads saw mixed performance amidst the ECB’s message. Semi-core spreads generally widened, while for example Spanish and Italian spreads narrowed a tad. Volatility will likely be elevated next week, as the ECB starts buying.
The US 10-year yield reversed course as well and ended the day slightly lower. The payrolls numbers, and more specifically wage data, are the key today. More signs of increasing wage pressures are needed to push the yield above 2.20%.
FX
EUR/USD gyrated around yesterday’s ECB press conference. The market was left with a somewhat EUR-negative impression, though. While the ECB President was optimistic on growth and inflation (EUR-positive), he also strongly signalled that the ECB will keep buying bonds beyond September 2016, should that be warranted. This helps anchor the EUR. With 1.10 taken out temporary yesterday however, the pair is in something of a “technical terra incognita”. There is a weekly low of 1.0765 from 2003, below which the market can aim at parity. Today’s non-farm payrolls could provide some needed impetus for further USD appreciation. We are looking for an above-consensus outcome.
The SEK was fairly steady yesterday, caught between strong Swedish data – the new normal, it seems – and slightly soft comments from the Riksbank regarding the krona. Despite a solid growth outlook, the market is currently underpricing the risk of further easing moves from the central bank. While ECB QE may cause some pressure on the cross, we would give the market a D- if this is not mostly priced in at this juncture. After all, Draghi may have hinted at QE already in August.
The NOK jumped yesterday as the oil investment survey came in above forecasts, causing the market to pare back some of its rate-cutting bets. Today’s most important release is the regional network survey, which we predict won’t surprise Norges Bank and hence mostly be a non-event. Barring macro surprises, the NOK remains fairly closely correlated with oil prices.