Rising risks of the euro area Consumer Price Index dipping below zero as a result of falling oil prices started another volatile day. At this point, there isn't a whole lot the European Central Bank can do about it in the near-term.
Source: Investing.com
Deflation is not a new concept for Europe. Outside of the euro area, Sweden (for example) continues to struggle with falling prices. Some are blaming this on Sweden’s central bank's premature raising of rates to curb housing price appreciation.
Eurozone periphery bond spreads continued to widen (particularly for intermediate maturities) on fears that a severe slowdown will strain government budgets. My guess is that this is temporary and yield-hungry investors will be back buying this paper in no time. Of course, if Spain’s little Ebola problem worsens, all bets are off.
The knock-on effect of lower oil prices is wreaking havoc on energy producing nations. The Russian ruble has been in free-fall while many high-net-worth Russians are panicking. The nation’s central bank seems helpless at this point.
Five-year Russian government bond yields are currently around 10%.
Now on to Venezuela, where the two-year government paper yield jumped above 30%.
Given the current oil prices, default looks imminent. Here is Venezuela’s sovereign Credit Default Swap — viva el socialismo!
This is probably just a coincidence, but Canadian manufacturing sales declined more than expected. The decline was mostly in autos and auto parts. It’s too early to see a major impact of falling crude prices in Canada’s economic numbers, but that’s coming.
US inflation expectations continue to fall. The five-year breakeven dropped below 1.4%.
This has really spooked the Federal Reserve. St. Louis Fed president James Bullard turned dovish, saying “inflation expectations are declining... for that reason I think that a logical policy response may be to delay the end of the quantitative easing”. This had a calming effect on the markets.Banks’ excess reserve balances have not been growing much lately as taper takes hold. Is this about to change?
US industrial production report was quite strong today, which also helped calm the markets somewhat. There is an issue with this trend, however. Wall Street Examiner publisher Lee Adler pointed out that a significant portion of this growth came from energy. And that sector is about to slow materially.
The US employment situation also looks quite good. Initial jobless claims are below the pre-recession levels. Will the energy sector slowdown reverse this trend as well?
In US credit-land, Business Development Companies (blue) and high-yield bonds (green) bounced from the lows today. Leveraged loans (red), however, continue to sell off. Why?
Part of the issue is that leveraged loan fund outflows from mutual funds have now reached about $1 billion (14 consecutive weeks of outflows) — and that’s substantial for leveraged loans where liquidity has never been great. More on this later.
Great time to launch a Collateralised Loan Obligation — for those who can raise the money. One other item worth noting here: The US high-yield bond spread widening has been sharp, but the level is still modest relative to recent history .
Back on the commodities front, the crude oil implied volume spike we’ve had recently is still nowhere near the highs of 2011.
Now some food for thought: The year is 2050; this is the population distribution for the US and Japan by age group.