- Bernanke confirms that rates will stay “exceptionally low” but give no indications that further monetary easing is under consideration
- Chinese PMI rises for a third straight month
- Unconfirmed newspaper reports that Chancellor Merkel is ready to accept a larger ESM bail-out fund
Markets overnight
Bernanke last night crushed hopes that further monetary easing is under consideration in the US. However, he firmly confirmed in his testimony to the Senate Budget committee that the latest more encouraging signs of improvement in the economy won‟t change the Fed‟s view that rates will stay “exceptionally low” at least through late 2014. The latter was underlined by Bernanke‟s comments on the labour market. Even though he acknowledged the positive developments in the labour market, he underlined that “the job market remains far from normal: the unemployment rate remains elevated, long-term unemployment is still near record levels, and the number of persons working part time foreconomic reasons is very high.”
Spanish and Italian yields fell yesterday after the ECB lent EUR529.5bn to 800 eurozone banks, which was slightly higher than market expectations. However, new fears about Portugal emerged after a new critical troika report was released. Portuguese 10-year yields jumped by 73bp to 13.75%, but still remain well below the 16.5% reached in January. According to the FT the ECB was in the market in the afternoon buying Portuguese bonds. Today might see more focus on peripheral bonds as ISDA is expected to decide if the seniority given to the ECB over private investors should trigger a credit event or not for Greek bonds. We don‟t think it will – at least not at this point. The EU summit begins today and this morning Süddeutsche Zeitung reports that Chancellor Merkel is ready to abandon her opposition to raising the lending cap on the ESM to EUR750bn. If true, it should support risk appetite and the euro this morning. The newspaper does not report how it has obtained the information.
The less dovish Bernanke who, at least for now, has closed the door for QE3 weighed on US sentiment and the rally in US equities came to a halt with S&P500 dropping 0.5%. Treasuries also suffered and 10-year yields rose above 2.0% last night. The poor sentiment has carried over to Asia, with Nikkei and Hang Seng down 0.5% this morning. Encouraging and better-than-expected Chinese PMI numbers have not been able to change the sentiment. China PMI increased for a third straight month in February from 50.5 to 51.0. Also the HSBC Markit PMI rose in February from 48.8 to 49.6.
The greenback got support last night from Bernanke and the weaker risk appetite and EUR/USD has fallen to 1.3350 after trading as high as 1.3470 ahead of the testimony. USD/JPY has been trading as high as 81.30 overnight. The NOK continues to trade at its strongest level against the euro since 2003.
Global Daily
Focus today: US ISM, initial jobless claims and the EU summit will be the main areas of focus today. ISM is expected to edge higher to 54.6 (consensus 54.5) from 54.1 in January. Regional surveys have generally been good – not least Chicago PMI yesterday –and jobless claims have improved steadily, also pointing to a further improvement in the economy. Today‟s claims data is expected to be broadly stable from last week (consensus 355k versus 351k last week) but this will keep the downward trend intact and underpin the picture of a decent labour market.
We do not expect any major results out of the EU summit. Decisions are mainly taken when markets are putting pressure on the politicians and with calm markets there is no scope for this now. Germany has so far rejected an increase in the firewall but stands quite alone with this view, but the Sûddeutsche Zeitung article might be an indication that Germany in the end will accept a larger bail-out fund. However, we doubt it will give in this early, as the Germans do not want to take too much pressure off for budget cuts and reforms.
Fixed income markets: The three-year LTRO had only a modest impact on the markets yesterday, with an allocated amount close to expectations. Although Bernanke said very little new in his testimony, yields rose, as he implicitly indicated that chances of another round of QE had declined. With no more scheduled LTROs from the ECB and a signal that the Fed is less likely to move on with QE3, the bond market might see some loss of support in the coming months. Consequently, it should turn more sensitive to the stream of improving macro data and higher commodity prices. With uncertainty persisting in Europe and the recent development in the US, we continue to highlight our view for a widening of the USD versus EUR rate spread in long maturities and for a steeper 2-10 curve in the USD forward space. If we get a strong ISM and/or claims report today, it will be supportive of these views. Note that France will print bonds today maturing in 2017, 2019, 2022 and 2026.
FX markets: We do not believe that the trend higher in EUR/USD has been broken despite the setback yesterday. Risk appetite is expected to recover once again – not least as yesterday‟s LTRO should continue to support eurozone peripheral bonds. Today, the FX market will be following the EU summit to see if Germany is in fact in the process of changing its tough stance on enlarging the ESM bail-out fund. We will also be keeping an eye on the Portuguese bond market.
A higher ISM should also support sentiment and be good news for carry and commodity currencies. In Scandinavia, EUR/NOK trades at a level not seen since 2003, and we are at a level where it might trigger some „verbal‟ intervention from Norges Bank ahead of the 14 March monetary policy meeting. However, we doubt the Norwegian central bank will be successful in weakening the NOK as was the case in September last year after the SNB announcement pushed EUR/NOK down to 7.50. This time the strengthening of the NOK is much more „fundamental‟ in our opinion. Hence, any spikes in EUR/NOK should be used for selling!
Scandi Daily
In Norway the PMI indicator is expected to fall slightly in February after the strong recovery in January. However, we expect it to stay firmly above 50 (consensus 53.8, last 54.9) and the current strong support to the NOK is expected to stay intact. It should be mentioned that NOK/DKK briefly touched parity yesterday afternoon and together with weak Swedish GDP numbers yesterday it really underlines that Norway is by far the strongest economy in Scandinavia at the moment.
Swedish February PMI data are released at 08.30. Recently the index has improved somewhat and breached the 50-line from below in January to 51.4. Estimates for the February dtaa are around 51.0