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ECB: Exit Talk is Premature
Italian PM Monti’s week-old suggestion that the Euroland debt crisis is almost over looks somewhat
hopeful based on developments overnight. Triggered by a poor Spanish bond auction, peripheral bond
yields have risen more than 20bps in Spain, Italy and Portugal and the Stoxx600 shed 2.1%. This price
action has carried through to the US, although the S&P500 closed with a comparatively modest 1.0%
loss. Treasuries have reversed some of yesterday’s Fed-inspired sell-off and the Dollar has strengthened.
Spain had planned to sell between EUR2.5 and EUR3.5bn of bonds overnight. The eventual sale yielded
EUR2.6bn – very much bottom of the range – at yields and coverage ratios that spoke of declining
demand. The January 2015 bonded yielded 2.89%, up from 2.44% on 15 March, with a bid-to-cover of
2.41 times (down from 4.96 previously), whilst the October 2016 bond yielded 4.319%, up from 3.376%
on 1 March, with a bid-to-cover of 2.46 times (down from 2.59 times previously). And the October 2020
bond, last auctioned in September, yielded 5.338% at a bid-to-cover of 2.96 times. If the ECB isn’t buying
peripheral debt directly (or gifting cheap money to banks so that they can buy) the pressure on yields
remains very much to the topside it seems. As Spanish PM Rajoy told his supporters overnight “Spain is
facing an economic situation of extreme difficulty, I repeat, of extreme difficulty, and anyone who doesn’t
understand that is fooling themselves,”.
Given the price action overnight, markets didn’t have too much difficulty digesting ECB President
Draghi’s post meeting message that “…given the present conditions of output and unemployment, which
is at historical high, any exit strategy talking for the time being is premature.”. The ECB’s general
description of the Euroland economy was largely unchanged from last month, with the risks to growth
said to be lying to the downside whereas the risks to inflation were unchanged. My colleagues did detect
a very modest incremental increase in hawkishness, with Draghi saying, “It also is important to keep in
mind that all non-standard measures are temporary in nature and all the necessary tools are available to
address upside risks to medium-term price stability in a firm and timely manner” (although he did go on to
say “I don't think I'm stepping up my rhetoric on inflation”). The ECB seems to be banking on some
improvement in the dataflow, with Draghi noting that “All the data do not take into account the impact of
the second LTRO.”
Speaking of the dataflow, in Europe a modest upward revision to the Euroland flash services PMI saw
the index end the month at 49.2, up from 48.8 last month. As a result, the composite PMI was revised up
to 49.1, down from 49.3 in February but up from the preliminary reading of 48.7. Within the services PMI
the greatest surprise was a unlikely 4.4pt increase in Spain’s index to 46.3. Italy’s index rose marginally to
44.3 from 44.1 in February. Countering this news was a very disappointing 0.3% mom rebound in German
factory orders in February which, after revisions, were down a greater than expected 6% yoy. Looking at
the detail, what struck us most was that demand from non-EMU countries rose 5% mom whereas
demand from EMU countries fell 3.2% mom (domestic demand fell 1.4% mom). The weakness was
concentrated in consumer goods where orders fell 3.8% mom after declining 2.8% mom in January. On a
brighter note, the UK’s services PMI rose to 55.3 in March. With the composite PMI now back above its
long-term trend the likelihood of the BoE announcing further QE continues to recede, at least for now.
In the US the dataflow was mixed. The ADP report recorded a 209k rise in private payrolls in March, not
too far away from consensus expectations. The non-manufacturing ISM did fall to 56.0 in March from 57.3
last month, but the activity and orders indices were still very robust (just under 59) and the employment
index rose to 56.7. The employment components of the twin ISM reports leave my US colleagues content
to call a 250k rise in official non-farm payrolls in March (and just as importantly, a further nudge down in
the unemployment rate to 8.2%, and possibly lower.)
Over the day ahead the focus will be on the latest US weekly jobless claims report, Canada’s March
labour market report and IP reports in the UK and Germany. Given the poor Spanish bond auction, there
will also be some interest in how the French government fares when it goes to the market seeking
EUR7.0-8.5bn today. The BoE MPC meeting should pass without any policy change or statement from the
Bank. Due to the Easter holiday break our next daily will be on Tuesday. Before then we will also receive
Friday’s US labour market reports and Monday’s BoC Business Outlook Survey.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ECB: Exit Talk is Premature
Italian PM Monti’s week-old suggestion that the Euroland debt crisis is almost over looks somewhat
hopeful based on developments overnight. Triggered by a poor Spanish bond auction, peripheral bond
yields have risen more than 20bps in Spain, Italy and Portugal and the Stoxx600 shed 2.1%. This price
action has carried through to the US, although the S&P500 closed with a comparatively modest 1.0%
loss. Treasuries have reversed some of yesterday’s Fed-inspired sell-off and the Dollar has strengthened.
Spain had planned to sell between EUR2.5 and EUR3.5bn of bonds overnight. The eventual sale yielded
EUR2.6bn – very much bottom of the range – at yields and coverage ratios that spoke of declining
demand. The January 2015 bonded yielded 2.89%, up from 2.44% on 15 March, with a bid-to-cover of
2.41 times (down from 4.96 previously), whilst the October 2016 bond yielded 4.319%, up from 3.376%
on 1 March, with a bid-to-cover of 2.46 times (down from 2.59 times previously). And the October 2020
bond, last auctioned in September, yielded 5.338% at a bid-to-cover of 2.96 times. If the ECB isn’t buying
peripheral debt directly (or gifting cheap money to banks so that they can buy) the pressure on yields
remains very much to the topside it seems. As Spanish PM Rajoy told his supporters overnight “Spain is
facing an economic situation of extreme difficulty, I repeat, of extreme difficulty, and anyone who doesn’t
understand that is fooling themselves,”.
Given the price action overnight, markets didn’t have too much difficulty digesting ECB President
Draghi’s post meeting message that “…given the present conditions of output and unemployment, which
is at historical high, any exit strategy talking for the time being is premature.”. The ECB’s general
description of the Euroland economy was largely unchanged from last month, with the risks to growth
said to be lying to the downside whereas the risks to inflation were unchanged. My colleagues did detect
a very modest incremental increase in hawkishness, with Draghi saying, “It also is important to keep in
mind that all non-standard measures are temporary in nature and all the necessary tools are available to
address upside risks to medium-term price stability in a firm and timely manner” (although he did go on to
say “I don't think I'm stepping up my rhetoric on inflation”). The ECB seems to be banking on some
improvement in the dataflow, with Draghi noting that “All the data do not take into account the impact of
the second LTRO.”
Speaking of the dataflow, in Europe a modest upward revision to the Euroland flash services PMI saw
the index end the month at 49.2, up from 48.8 last month. As a result, the composite PMI was revised up
to 49.1, down from 49.3 in February but up from the preliminary reading of 48.7. Within the services PMI
the greatest surprise was a unlikely 4.4pt increase in Spain’s index to 46.3. Italy’s index rose marginally to
44.3 from 44.1 in February. Countering this news was a very disappointing 0.3% mom rebound in German
factory orders in February which, after revisions, were down a greater than expected 6% yoy. Looking at
the detail, what struck us most was that demand from non-EMU countries rose 5% mom whereas
demand from EMU countries fell 3.2% mom (domestic demand fell 1.4% mom). The weakness was
concentrated in consumer goods where orders fell 3.8% mom after declining 2.8% mom in January. On a
brighter note, the UK’s services PMI rose to 55.3 in March. With the composite PMI now back above its
long-term trend the likelihood of the BoE announcing further QE continues to recede, at least for now.
In the US the dataflow was mixed. The ADP report recorded a 209k rise in private payrolls in March, not
too far away from consensus expectations. The non-manufacturing ISM did fall to 56.0 in March from 57.3
last month, but the activity and orders indices were still very robust (just under 59) and the employment
index rose to 56.7. The employment components of the twin ISM reports leave my US colleagues content
to call a 250k rise in official non-farm payrolls in March (and just as importantly, a further nudge down in
the unemployment rate to 8.2%, and possibly lower.)
Over the day ahead the focus will be on the latest US weekly jobless claims report, Canada’s March
labour market report and IP reports in the UK and Germany. Given the poor Spanish bond auction, there
will also be some interest in how the French government fares when it goes to the market seeking
EUR7.0-8.5bn today. The BoE MPC meeting should pass without any policy change or statement from the
Bank. Due to the Easter holiday break our next daily will be on Tuesday. Before then we will also receive
Friday’s US labour market reports and Monday’s BoC Business Outlook Survey.
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