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Daily Commentary 10/03/15

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Plunge in Bund yields suggests EUR can fall further Yesterday was the first day for the ECB’s quantitative easing program. While one might have thought it was fully priced in by now, in fact German 10-year yields collapsed 8 bps to 0.31%, a huge move considering how low they are already (the record low was 0.30% on Feb. 26th). By comparison, Italian 10-year yields were down only 4 bps and Portuguese 10-year yields were virtually unchanged. The big move in Bunds suggests that the move was not totally priced into the bond markets, which means it may not have been totally priced into the FX market, either. That suggests EUR can still fall further.

Greek situation still critical Apparently the recent “solution” to Greece’s problems was no solution at all. They have not even started negotiations. “Little has been done,” according to Eurogroup Chairman Dijsselbloem. “Technical level” talks between Athens and its creditors will start in Brussels on Wednesday. “What I know is that we can only release further loans from the European funds if there is full agreement on the total package and if they start implementing the program. So far two weeks have gone by and neither of the two have happened,” said Dijsselbloem. Apparently the creditor group wasn’t impressed with Greece’s reform proposals; two representatives of the group called them “amateurish” and said they don’t signal substantial progress to meeting the country’s commitments. Greece is apparently still short some EUR 1bn for March, when about EUR 2bn of debt-servicing payments come due. Note that while yields elsewhere in the Eurozone were unchanged to lower thanks to QE, Greek three-year yields were up almost 200 bps yesterday! The yield spread between Treasuries and Bunds is now at a record wide level. So QE further compresses the risk premium in European bond yields even while the risk in EUR remains acute; not a good combination for the currency!

Two more Fed speakers back mid-year hike Cleveland Fed President Loretta Mester said the US economy had built up “sustainable momentum” and repeated that she’s “comfortable” with an interest rate rise in the first half of the year. This is no surprise as she has previously said that “we want to bring the policy rate up.” Mester does not vote this year. Richard Fisher, who is stepping down soon as President of the Dallas Fed, warned against waiting too long to raise rates and said policy makers should raise rates before the economy reaches full employment. Fisher is a known super-hawk who is no longer on the FOMC so he will not have any say in making policy. On the other hand, we have yet to hear any voices urging the Fed to wait. (Note: yesterday’s schedule was incorrect. Minneapolis Fed President Kocherlakota did not speak yesterday.) Nonetheless, Fed funds rate expectations were down 4 bps in the long end as the market unwound some of the post-NFP move,

Kiwi crying over spoiled milk? NZD fell sharply as trading in dairy futures and options and shares in dairy companies were halted. The police are investigating a criminal threat to poison infant formula unless the country stops using a certain pesticide. This would cause huge damage to the world’s biggest dairy exporter. New Zealand exported NZD 1.2bn of dairy products last year, accounting for 29% of total exports. No trace of the poison was found. Nonetheless, the threat could weigh on NZD until it’s resolved. Meanwhile, AUD was down even more than NZD compared to yesterday’s European opening, after the National Australia Bank Business confidence index for February fell.

China’s inflation rises as food prices jump China’s CPI rose faster than expected at 1.4% yoy (expected: +1.0%, previous: 0.8%) but the PPI fell more than expected at -4.8% yoy (expected and previous: -4.3%). Inflation is focused in food, which may have had something to do with the timing of the Chinese New Year: food inflation jumped to +2.4% yoy from +1.1%, while non-food inflation rose only from +0.6% to +0.9%. It’s China’s non-food inflation that’s important for the rest of the world, not its food inflation. In any event, the overall inflation rate remains very low, and with the money supply target for this year lower than the actual result for last year, I don’t expect the inflation rate to rise particularly. Given China’s prominence as a trading nation, this disinflationary impulse is likely to keep downward pressure on prices globally and continue the “currency wars” that the financial world has fallen into as a result of central banks’ anti-deflation stance.

Today’s highlights: We have a relatively light day today as regards indicators. During the European session, French industrial production for January is expected to fall, a turnaround from the previous month.

In Norway, the CPI is forecast to have accelerated in February, probably due to the fact that the effect of lower oil prices is gradually fading. This could support the Krone temporarily as the market tries to anticipate the result of the Norges Bank monetary policy meeting on the 19th of March.

In the US, only data of secondary importance are coming out. The NFIB small business optimism for February is expected to have increased a bit, staying fractionally below its December 7-year high. While this indicator is not particularly market-affecting, it’s well worth watching because of the Fed’s emphasis on employment. Small businesses employ the majority of people in the US. The Job Opening and Labor Turnover Survey (JOLTS) report for January is forecast to show that the number of job openings has increased marginally. The market will also be watching for the “quit rate,” which Fed Chair Janet Yellen recently singled out as “a barometer of worker confidence in labor market opportunities.” Following last week’s strong employment data, this is likely to keep the USD supported. Wholesale inventories for January are also coming out.

As for the speakers, ECB Governing council member Ewald Nowotny, BoE Governor Mark Carney and BoE MPC member Ian McCafferty speak.

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