Markets
Risk-off in the wake of the virus outbreak eased further today and even made room for a cautious return of risk-on, at least on stock markets. European bourses advance 0.2-0.5% even as the total amount of corona cases continues to rise. Core bond markets show another picture however. UST’s and the German Bunds both easily find their way higher with the former outperforming. The US yield curve shifts south. Yields decline 2.5 to 3.5 bps across the curve. The News that the German government beefed up 2020 growth to 1.1% and expects a mild increase to 1.3% for 2021 didn’t really catch market’s attention. German rates slip about 3.5 bps at longer tenors (10y, 30y). USD/JPY treads water in the low 109 area. EUR/USD resumed yet again its protracted downtrend. The couple is nearing key support at 1.0981/89. The Fed policy meeting tonight will probably decide over the couple’s faith. Last year’s Fed’s final dot plot showed near-consensus on keeping policy rates stable throughout 2020 while completing its policy review. Recent events, speeches by governors, eco data and inflation figures suggest no alternation to this scenario even if short term money markets discount a 25 bps rate cut by the end of the year. Fed Chair Powell could be grilled on the central bank’s balance sheet though at the Q&A session. Since September 2019, the balance sheet rose from $3.8tn to $4.1tn as the Fed first introduced (term) repo operations and later Treasury bill purchases ($60bn/month) to stem problems in the US repo markets originating from falling reserve levels. It’s an open question on how the US central bank sees these emergency tools evolving. Will they become a permanent policy feature (e.g. standing repo facility) and/or will bill purchases be phased out during Q2?
Add an empty eco calendar to a looming and potentially eventful central bank meeting. The result is a listless trading session. EUR/GBP is trading virtually unchanged at 0.846. Investors are clearly sidelined in the run-up to the Bank of England policy meeting tomorrow. The market implied probability of a rate cut surged to +70% following a string of weak data last week but has eased over the past few days to about 44%. A bigger than expected rebound in PMI confidence last Friday, a leading indicator for growth, and the gradual return of risk-on are among the reasons. We assume that if the BoE delivers, a knee-jerk downleg in sterling won’t go very far as the loss of rate support might be counterbalanced by markets raising their hopes for fiscal stimulus by the new government. A hawkish surprise (no rate cut, projected recovery in growth and inflation following the post-election improvement in business sentiment) could well push EUR/GBP towards 0.84 and below – especially given the recent sluggish performance of the euro.
News Headlines
Euro area M3 money supply slowed to 5.0% Y/Y in December from 5.6% in November. In the credit side, the annual growth rate of credit to euro area residents was unchanged at 2.0%. Credit to the private sector increased to 3.4% from 3.2%. Loans to households rose to 3.7% Y/Y (from 3.5%), the highest reading in 11 year. Adjusted loans to non-financial corporations eased to 3.2% from 3.4%, being the lowest in 24 months.
Polish growth slowed more than expected to 4.0% in 2019 (4.2% expected) as the fall-out from the global economic downturn also hurt the expansion in the country. On the production side, industry activity (4.2%) and even more construction (2.8%) mirrored the slowdown in activity. On the spending side, individual consumption held up quite well (3.9% from 4.3% in 2.18) as demand was supported by government spending programs.
Catatonia’s regional President Torra said he will call early elections after a coalition with another pro-independence party broke down. It might also cause instability for the national government in Madrid, which relies on support of one of the Catalan separatist parties. Spanish bonds are slightly underperforming today (+2 bps).
