Markets
There’s clear nervousness lingering in markets ahead of tonight’s important Fed policy meeting. There are no major policy changes expected but growth (and inflation) forecasts are seen materially higher because of the recently approved Biden stimulus package. It might prompt some governors to push forward their personal rate hike expectations. This in turn will fuel the market debate whether ultra-easy monetary policy will gradually be withdrawn sooner than the Fed and Powell are currently communicating. Powell will do his utmost best to convince markets of easy policy for still a very long time by stressing the still-fragile economy and labour market. Only if accompanied by actual action (eg. increased pace of bond buying), his words could have some soothing effect. However, given the boosted growth forecasts, the timing of such increased monetary stimulus would be very odd and thus unlikely. USTs are being sold across the curve and is dragging the German Bund with it. The long end underperforms. US yields rise 1.6 bps (5-yr) to 3.6 bps (10-yr, testing new intermediate resistance area). The US 30-yr yield also gains about 3 bps and is testing important resistance around 2.41%. The German yield curve bear steepens with yields 1.5 bps (5-yr) to 4.3 bps (30-yr) higher. We note a striking divergence in US and German real yields of late with the latter even setting a new all-time low over the past few days. Peripheral spreads to the German 10-yr widen, with Greece (+5 bps) underperforming despite drawing near-record demand for its first 30-yr bond sale since 2008. Attracting 26bln euros of orders for its 2.5bln bond sale allowed it to cut pricing by 10bps from initial guidance (MS+150bps). The Flemish Community successfully sold 1.5bln euros of a 25Y sustainability bond priced at OLO+21 (vs. +25 area initial guidance). Order books amounted to more than 4.5bln.
FX markets are an ocean of calm compared to bonds. The dollar held its nerve and the euro licked its wound after yesterday’s blow. EUR/USD flipflopped around 1.19 within a narrow trading range as it awaits the Fed. The trade-weighted dollar stabilizes near 91.87. USD/JPY holds north of 109. EUR/GBP briefly dipped below the 0.855/0.856 support area but soon reversed course to trade virtually unchanged at 0.857. The couple might come under pressure because of EUR/USD spillover effects from the Fed. But for a sustained break lower, sterling might first need more guidance from the Bank of England tomorrow.
News Headlines
According to the council of economic advisers of the German government, the German economy is expected to shrink about 2.0% in the first quarter of this year as ongoing lockdown measures continue hinder economic activity. The full-year outlook for 2021 was also downwardly from 3.7% to 3.2%. Economic activity is now expected to return to a pre-corona level at the turn of the year 2021/22. Growth for 2022 is now forecast at 4.0%. The council still sees the development of the coronavirus pandemic as the biggest downside risk and repeated that ‘the question on how quickly the economy can get to normal mainly hinges on the vaccination progress’. In this respect, council member Grimm said that the country needs to speed up daily vaccinations by 50% in order for the country to reach the EU target of 70% of the adult population by end September.
The Association for Financial Markets in Europe (AFME) today reported that European government bond trading volumes last year rose to the highest since 2015. At EUR 71.7 bln average annual trading volume rose 0.9% compared to 2019. European governments issued a record 3675 bln in bills and bonds. Outstanding volumes of European sovereign ESG bonds reached EUR 116.7 bln as record EUR 34.9 bn volume of green government bonds was issued in 2020FY and inaugural SURE social bonds were issued by the European Commission. AFMA also sees evidence of a premium that investors were prepared to pay to hold green bonds of Ireland, France and Belgium.
