Recap 1-11-13: European Rates

Commentary:

Euribor futures are pricing in 3 hikes over the next three years. That’s probably too much, even though the ECB is an inflation targeting central bank. With unemployment at 11.8% and still rising, even Trichet would be hard pressed to find inflation risks here. (Unemployment is in white and inverted below)

It’s also worthwhile to note that even though 3m Euribor is trading ~55bps below the ECB refi rate, this is probably sustainable as long as the ECB’s unconventional operations remain outstanding. Recall that the ECB announced two 3 year LTRO’s around a year ago, which flooded the market with over a trillion Euros of liquidity. These LTRO’s mature in early 2015. As along as all this liquidity remains in the system, the 3m Euribor rate – the rate at which European bank are willing to lend to each other – are likely to remain near zero.

Current model outputs suggest a possible first hike in mid 2016, IF we conservatively assume that last month’s unemployment was the peak AND we get a repeat of the mid 90’s scenario. This all suggests that the hikes priced in through 2015 are unlikely to materialize.

Notable:

  • Japan unveils Y10.3tn stimulus
  • Japan’s current account deficit was 222.4bn yen versus 17.1bn yen expected.
  • Japan Eco Watchers Outlook Survey jumped to 51 in Dec vs 42.5 exp and 41.9 prev

Upcoming Data:

  • Mon: BoC Loan Officer Survey
  • Tue: US Retail Sales
  • Wed: US CPI, NAHB Index,
  • Thu: Australia Employment, US Housing Starts, US Jobless Claims, China Data
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