Recap 2014-12-11


The weak LTRO take up means that consensus now expected ECB to conduct QE in 1Q. Estimates seem to be 500bn-1Trn, though views on timing are split between January and March. No surprise there. However, banks seem to think that QE will depress German yields further. I disagree with that – QE is defacto risk sharing, and should depress the credit premium for periphery credit. It is possible that, like in the US, the start of QE caused the risk free asset to sell off, and lower credit instruments to appreciate. This interesting chart from CreditSights, via FTA, suggests that Bund yields are already discounting a ~400bn expansion of the ECB’s balance sheet:

Separately, here’s an updated intraday chart of HY CDX spreads vs S&P futures:

Couple of interesting links:


  • US Retail Sales were strong, rising 0.7% MoM vs 0.4% exp. The Control group rose 0.6% vs 0.5% exp
  • Jobless Claims ticked down to 294k vs 297k exp and prev
  • US import prices declined to -2.3% YoY vs -2.6% exp and -1.8% prev
  • AU Employment jumped 42.7k vs 15k exp, driven by part time employment. UER ticked up to 6.3% as exp vs 6.2% prev, as the participation rate ticked up to 64.7 vs 64.6 prev
  • UK RICS House Price Balance declined to 13 vs 15 exp and 20 prev
  • Japan Machine Orders declined to -4.9% YoY vs -0.3% exp and +7.3%
  • The 3rd LTRO had a take up of €129 bn allocated vs. expectations of €120-180 bn
  • A Reuters poll of economists revealed that 25 of 27 think the ECB will buy sovereign bonds in the next few months, with March looking the most likely for the announcement.
  • Norway surprised with a 25 basis point rate cut to 1.25%. As Europe’s largest oil exporter, the drop in oil prices is hurting economic growth. The bank sees a 50/50 chance for another cut next year.
  • BoE moving to same-day publication of policy decisions, MPC minutes and Inflation Reports, as of August 2015
  • China is adding ~400bn yuan (~$65bn) of liquidity to the market through a policy bank, the China Development Bank. This comes after the PBOC 500bn injection in September. Officials are worried that if they outright cut the RRR it could lead to too much lending to sectors already suffering from overcapacity. WSJ
  • Fitch warned it is likely to downgrade Japan’s credit rating sometime early next year after the government delayed the sales tax hike.


  • Thu: New Zealand PMI
  • Fri: China Retail Sales, IP, US Core PPI, UMichigan Confidence, Japan Tankan
  • Mon: US Empire Mfg, NAHB Survey, RBA Minutes, China HSBC Mfg PMI,
  • Tue: EU PMI, UK CPI, German ZEW, US Housing Starts, Markit Mfg PMI, Japan Trade Balance
  • Wed: BoE Minutes, UK Employment, US CPI, Oil Inventories, FOMC, SEP, NZ GDP
  • Thu: German IFO, US Jobless Claims, Markit Services PMI, Philly Fed, NZ Business Confidence, UK GfK Consumer Confidence

3 thoughts on “Recap 2014-12-11

  1. Hi again, hope you don’t mind me commenting 2 days in a row.

    That’s an interesting chart on how much Bunds have priced. I agree with your view on where Bund yields should likely go if/when ECB does QE. Do you think that with Bund yields going higher it should also help longer dated UST term premia – and consequently yields – go higher as well?

    While most people seem to agree on front US yields going higher; after this year’s disaster around betting on 10y+ yields doing the same there appears to be exhaustion and the sell side outlooks I’ve read more or less now have a neutral directional view. Thanks.

    1. No worries, comment away!
      Higher bund yields will probably help push tsy yields a bit higher, but after taking into account both the likely size of the move in bunds and the beta, the effect will probably be small, imo.

      I hear you about exhaustion, but I don’t think us 10y yields are that mispriced. The macro backdrop suggests that lt yields much higher than here could hit growth pretty hard, imo.

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