Macro Weekly Draghi and the bond market
Group Economics
Nick Kounis +31 20 343 5616
5 June 2015 ECB President Draghi has shown the magic touch on a number of occasions, managing to shape market expectations with a well-coined phrase. However, this week his signal that the central bank was prepared to step up QE if necessary fell on deaf ears, with Bund yields surging further, the euro strengthening and equity markets falling in the slip stream. We think the ECB will make further efforts to stem ongoing tightening in financial conditions, with further verbal intervention the next step. Meanwhile, Greece looks to have bought itself some more time by deferring IMF payments. Economic data this week was generally positive on both sides of the Atlantic. The strong US jobs data confirms the outlook for a September Fed rate hike. Losing the magic touch?
Draghi unable to stem rise in yields
ECB President Mario Draghi has a record of being able to turn investor sentiment with the power of words. His pledge to ‘do whatever it takes’ to save the euro was a watershed moment in the euro crisis. More recently, his signals that the ECB would
German 10-y government bond yield, %
1.0 0.8
again do whatever it takes to revive inflation had a big impact in easing financial conditions even before the announcement of QE. Super Mario came to the rescue once again. However,
0.6 0.4
this week, Mr Draghi seemed to lose his magic touch. 0.2
Draghi unable to prevent bond yields and euro rising During and after Wednesday’s ECB press conference,
0.0 Jan-15
Feb-15 Mar-15
Apr-15 May-15
Jun-15
government bond yields and the euro rose in tandem, while equity markets fell in their slip stream. The sell-off in bonds
Source: Bloomberg
and euro strength occurred despite ECB President Draghi stepping up his dovish tone on QE, which seems to have been
The ECB’s options
designed to calm the markets. He mentioned that if necessary
So what can the ECB do next given that Mario Draghi’s dovish
the ECB could step up QE and that an unwarranted tightening
commentary fell on death ears earlier in the week? The ECB’s
of financial conditions could be a trigger for that. However,
next step could be to step up verbal intervention by various
investors focused more on his subsequent comments that
degrees. The central bank could say that it saw an
volatility in the bond market was here to stay, which gave the
‘unwarranted tightening of financial conditions’ making explicit
impression that the ECB was happy to stand aside.
its displeasure at recent market developments. The next step could be to mention ‘tighter financial conditions’ as being a
Tightening of financial conditions
downside risk to economic growth. If words do not work, it may
Following the upward trend in bond yields and the euro of the
have no choice but step up QE, though that is not our base
last few days, financial conditions have tightened somewhat
case scenario.
more than the ECB assumed in its projections for this year. Given current market prices, weighted average eurozone bond
Deconstructing the bond market correction
yields are above the levels assumed for this year.
Government bond markets have been extremely volatile over the last few weeks, though the trend for yields has been clearly
The ECB’s projections show inflation just about reaching the
upwards. What explains the correction? Bond yields were
target in 2017, at 1.8% compared to the its price stability goal
(and still are) at low levels, which did not fit in with macro
of close to but below 2%. This means that the sell-off in the
fundamentals. The ECB’s large bond purchases against the
bond market and euro strength could eventually threaten the
background of weak net supply of bonds had been keeping
ECB achieving its goal.
prices elevated. However, over the last few weeks net supply all of sudden rose. In addition, economic data has dispelled fears of a deflationary spiral. Finally, the market is illiquid, which may exaggerate moves.
2
Macro Weekly - 5 June 2015
Tug of war for bond yields
US labour market in rude health
The big question is what happens next? As discussed above,
Nonfarm payrolls month-on-month change, 000s
the ECB is likely to step up its attempts to calm the markets. In
600
addition, the core government bond market will likely return to
400
a situation of scarcity as bond issuance will soon dry up again,
200
while ECB bond buys will continue. We therefore think that the
0
rise in yields will at least pause or even reverse somewhat in
-200
the months ahead. In the medium term bond yields are set to
-400
rise significantly as the economic recovery strengthens and
-600
markets start pricing in a normalisation of monetary policy.
-800 -1,000
Upside risks
97
99
01
03
05
07
09
11
13
15
The risks are tilted to the upside. Recent market developments suggest that the sharp upward correction in yields that we
Source: Thomson Reuters Datastream
expected to materialise at the turn of next year, may have started earlier. Indeed, the recent rise in yields has been
Eurozone recovery on track
extremely abrupt and has taken us by surprise. We are
Reports coming out of the eurozone economy over the last few
currently reviewing our near term forecasts.
days have been encouraging. Retail sales were up by 0.7% mom in April. Although that came after a 0.6% decline in
Greece buys more time
March, that followed five successive monthly gains.
The Greek government deferred its payments to the IMF. The
Meanwhile, German factory orders rose by 1.4% in April after a
first payment was due today, while three more payments were
1.1% gain in March. There was more positive news in the
scheduled during the course the month. All these payments –
shape of the ECB’s bi-annual Survey of the Access to Finance
totalling EUR 1.5 bn will now be bundled towards the end of
of Enterprises in the eurozone. It showed that SMEs reported a
the months. The action is allowed under IMF rules, but has
marked improvement in the availability of bank loans. Given
been very rarely used. Somewhat comically, a European
that SMEs account for 70% of all eurozone employment this is
Commission spokesperson said that the decision ‘does not call
a key development for the economic outlook. Indeed, the
into question the ability of a member state to honour its
labour market continues to improve. Unemployment fell to
financial obligations’.
11.1% in April from 11.2% in March.
Near term pressure to agree is less
Eurozone inflation returns to positive territory
The move gives the government more time to reach a deal, but
Eurozone inflation turned positive in May, rising to 0.3% yoy
also reduces the incentives to compromise and reach an
from 0% in April. The period of negative inflation looks to be
agreement in the near-term as liquidity pressures will be less.
behind us, having lasted only four months. So much for Japan
Eurogroup head Jeroen Dijsselbloem said that Greece had yet
scenarios. There was an upward effect from food and energy
to respond to a proposed text for a deal from eurozone finance
prices, but the really big story in the report was the rise in
ministers. He said he hoped to receive it today. There is a
underlying inflation. Core inflation jumped to 0.9% yoy from
possibility that the Greek government will make a counter
0.6% in April. The rise may well prove a blip, but it does
proposal.
emphasise that deflation fears were exaggerated.
New Greek elections?
US labour market remains buoyant
In addition, there are rumours that new elections may be
US economic data were also generally positive this week. Both
necessary to give the government the mandate for any
the ISM manufacturing index and the Markit manufacturing
agreement. This could be the case if it judges that the
PMI rose in May. The equivalent surveys for the services
measures it needs to adopt are not consistent with the
sector slipped but are still at high levels. Crucially, the labour
manifesto it was voted on, or if the left wingers leave in protest,
market remains in rude health. Nonfarm payrolls jumped by
meaning Syriza loses its parliamentary majority. An often
280K in May after the 221K rise in April, which was well above
mentioned possible date for new elections in 28 June. Given
expectations. Average hourly earnings firmed to 0.3% mom.
the bundled IMF payments, the Greek government might be
While the unemployment rate edged up, this reflected a rise in
able to make it through to then, assuming that it can roll-over
the participation rate. The report signals that the US economy
upcoming bond payments. We expect a deal eventually,
is likely to regain momentum after a weak Q1 and confirms the
though the situation looks set to drag on.
outlook for a September Fed rate hike.
3
Macro Weekly - 5 June 2015
Main economic/financial forecasts GDP grow th (%)
2013
2014
2015e
2016e
2.2
2.4
2.7
3.1
United States
-0.4
0.9
1.8
2.3
Eurozone
Japan
1.6
-0.1
1.1
1.2
United Kingdom
1.7
2.8
2.8
2.6
China
United States Eurozone
3M interbank rate
28/05/2015 04/06/2015
+3M
+12M
2015e
0.28
0.28
0.7
1.5
0.9
2016e 2.4
-0.01
-0.01
0.00
0.00
0.00
0.10
Japan
0.17
0.17
0.2
0.2
0.2
0.2
United Kingdom
0.57
0.57
0.6
1.5
1.0
2.0
28/05/2015 04/06/2015
2016e
7.7
7.4
7.0
7.0
World Inflation (%)
3.2 2013
3.2 2014
3.2 2015e
3.8 2016e
+3M
+12M
2015e
United States
1.5
1.6
0.1
2.5
US Treasury
2.14
2.31
2.5
2.8
2.7
2.9
Eurozone
1.3
0.4
0.4
1.7
German Bund
0.54
0.83
0.3
1.2
0.5
1.4
Japan
0.3
2.8
0.8
1.4
Euro sw ap rate
0.88
1.12
0.6
1.5
0.8
1.6
United Kingdom
2.6
1.5
1.1
1.9
Japanese gov. bonds
0.40
0.47
0.6
1.0
0.7
1.0
China
2.6
2.0
2.0
2.5
UK gilts
1.82
2.03
1.7
2.5
2.0
2.7
World Key policy rate
4.3 04/06/2015
3.9 +3M
3.7 2015e
3.8 2016e
28/05/2015 04/06/2015
+3M
+12M
2015e
2016e
Federal Reserve
0.25
0.50
0.75
2.25
EUR/USD
1.09
1.13
1.00
1.05
1.00
1.15
European Central Bank
0.05
0.05
0.05
0.05
USD/JPY
124.0
124.4
125
135
128
135
Bank of Japan
0.10
0.10
0.10
0.10
GBP/USD
1.53
1.54
1.47
1.50
1.49
1.51
Bank of England
0.50
0.50
0.75
1.75
EUR/GBP
0.71
0.73
0.68
0.70
0.67
0.76
People's Bank of China
5.10
4.85
4.85
4.85
USD/CNY
6.20
6.20
6.26
6.37
6.30
6.40
10Y interest rate
Currencies
Source: Thomson Reuters Datastream, ABN AMRO Group Economics.
KEY MACRO EVENTS Day
Date
Time
Country
Key Economic Indicators and Events
Period
Latest outcome
Consensus
Monday Monday Monday Monday
08/06/2015 08/06/2015 08/06/2015 08/06/2015
01:50:00 08:00:00
JP DE CN CN
GDP - % qoq Industrial production - % mom Exports Imports
1Q F Apr May May
0.6 -0.5 -6.4 -16.2
0.7 0.6 -4.0 -10.0
Tuesday Tuesday Tuesday Tuesday Tuesday
09/06/2015 09/06/2015 09/06/2015 09/06/2015 09/06/2015
03:30:00 10:30:00 11:00:00 15:00:00 16:00:00
CN GB EC US US
CPI - % yoy Trade balance - GDP mln GDP - % qoq NFIB small business optimisme - index US Job Openings by Industry
May Apr 1Q final May Apr
1.5 -2817 0.4 96.9 4994
1.3 -2533 0.4
Wednesday Wednesday Wednesday
10/06/2015 10/06/2015 10/06/2015
01:50:00 23:00:00
JP NZ CN
Machinery orders private sector - % mom Policy rate - % M2 money growth - % yoy
Apr Jun 11 May
2.9 3.50 10.1
-2.4 3.39 10.5
Thursday Thursday Thursday Thursday Thursday
11/06/2015 11/06/2015 11/06/2015 11/06/2015 11/06/2015
07:30:00 07:30:00 07:30:00 14:30:00 16:00:00
CN CN CN US US
Fixed investments - % yoy Retail sales Industrial production Retail sales - % mom Business inventories - % mom
May May May May Apr
12.0 10.1 5.9 0.00 0.1
11.9 10.0 6.0 0.90 0.1
Friday Friday Friday Friday Friday
12/06/2015 12/06/2015 12/06/2015 12/06/2015 12/06/2015
06:30:00 11:00:00 14:30:00 14:30:00 16:00:00
JP EC US US US
Industrial production - % mom Industrial production - % mom Prod. prices index - % mom Prod. prices index excl food and energy - % mom Univ. of Michigan cons. confidence - index
Apr F Apr May May Jun P
1.0 -0.3 -0.40 -0.20 90.7
0.3 0.40 0.10 91.2
ABN AMRO
0.8
3.50
1.0
0.5
92.0
Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)
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