Recap 2015-02-26: On EU green shoots, and a comparison of net issuance after QE in Europe vs Japan


EU growth and inflation pessimism remains very widespread. Reuters reports that a poll conducted by ratings agency Fitch yesterday showed that only 27% of surveyed investors believe that the European Central Bank’s quantitative easing programme (to be started in March) will lift inflation. This survey, which polled managers of over EUR8trn of fixed-income assets, also showed an all-time high of 65% seeing a risk of deflation taking hold in the Euro area, up from a total of 53% back in October.

EU bond markets reflect this pessimism quite thoroughly. It seems that since most investors expect QE to fail, they are not willing to sell their bonds to the ECB. EUR 30y real swap yields are at zero.

Having said that, the growth green shoots are now quite visible. Money growth is at or above levels not seen since 2009/2010. Loan growth is now in positive territory for the first time since 2012.


I noted earlier that EU wide consumer confidence is very strong. That is not limited to the core – Italian Consumer Confidence hit the highest level since early 2010:


Of course German confidence is already very high, but it may surprise you that Consumer Confidence in Spain is almost as high as it is in Germany. The only laggard is France, but even there, things have been picking up.

With respect to the effect of the ECB QE program, EUR bond bulls seem to be focusing on the net flow, rather than the stock effect. I’ve already gone over my views on the former yesterday, so I won’t rehash them here. But it probably is worth comparing the net flow effect vs Japan, where, it is noted, long end yields remain above well Europe’s.

Europe (bn €) Japan (tn ¥) Notes
Net Supply (ex Coupons) 243.0 31.7 Gross Supply – Redemptions. Est via Budget Deficit * Nominal GDP
Assumed Purchases 430 80 Citi Estimates, BoJ Statement
Annualized 645 80 Assuming ECB starts in March,
Net Supply After QE -402.0 -48.3
Nominal GDP 10,124 488
Net Issuance in % of GDP -4.0% -9.9%
Budget Deficit F’cast -2.4 -6.5
times NGDP 243.0 31.7

Readers are encouraged to check my math, but I think it’s in the ball park. The point is, QE-adjusted net issuance in Japan is well below Europe’s, so flow arguments alone are not likely to be a complete explanation of current yield levels here.

With respect to the stock effect, many commentators have already noted that the size with respect to GDP is reasonably modest.


The point is that stock and flow effects do not seem to be sufficient explanations for the current low yields in the European long end.


  • German GfK Consumer Confidence improved to 9.7 vs 9.5 exp and 9.3 prev
  • EU Money Supply was very strong, see chart above
  • UK 4Q GDP rose 0.5% as exp, and 2.7% prev
  • Italy Consumer Confidence jumped to 110.9 vs 104.4 exp and 104 prev. This was the highest print since early 2010
  • US Core CPI was stable at 1.6% as exp. The Headline figure declined to -0.1% as ep vs +0.8% prev
  • Durable Goods Orders rose 2.8% vs 1.6% exp. The core measure rose 0.6% vs 0.4% exp
  • Canada Core CPI was stable at 2.2% vs 2.1% exp


  • Thu: Japan Employment, CPI
  • Fri: Month End, German CPI, ChicagoPMI, US Pending Home Sales
  • Weekend: ChinaMfg PMI, Australia Mfg PMI, New Home Sales, Japan Markit Mfg PMI
  • Mon: Italy Mfg PMI, EU Final PMI, UK Mfg PMI, EU Unemployment, CPI estimate, US Personal Income, Canada Mfg PMI, US Markit PMI, ISM, RBA, AU Building Approvals
  • Tue: Canada GDP, Australia GDP, Japan Services PMI, China HSBC Services PMI
  • Wed: Italy Services PMI, UK Services PMI, US ADP Employment, Markit Services PMI, ISM Non-Mfg, BoC, AU Retail Sales, Trade Balance
  • Thu: BoE, ECB,