Traders sat and waited for “Central Bank Thursday” yesterday with markets quiet for most of the session. The morning session was dominated by news from Germany with an auction of 5yr debt showing how much cash is still flying into safe haven assets. This was the first auction of 5 year German debt that yielded less than 1% and demand was strong; shifting EUR8.97bn against a targeted EUR4bn. This comes in the same week that a 6 month paper auction from Germany was sold with negative yields i.e. paying to lend money to Germany and shows that despite soothing talk from some members of the EU political class, the market is still very concerned about solvency going forward.
This comes a couple of hours after the initial estimate of German GDP for Q4 last year was revealed as “roughly” -0.25% and could be revised lower. This is bad news for the entire Eurozone; if Germany’s not growing, nobody will be. While we do not believe that we will see a recession in Germany, a slip in its output will only exacerbate the problems in the rest of Europe.
Sterling had one of its toughest days in a while yesterday with GBPUSD losing around a per cent while GBPEUR has fallen by around 50bps overnight. The dollar was strong through the day as safe havens were bought as a result of the ratings agency Fitch issuing comments on the future of the Eurozone. The ratings agency said that the ECB should ramp up its buying of troubled Eurozone debt to support Italy and prevent “cataclysmic” euro collapse. The use of “cataclysmic” is interesting; this is proper flamethrower language and may be used as a rocket up the ECB before their meeting today. There was little reaction to this in the rates markets however with Italian and other peripheral debt yields trading lower over the course of the session.
While it is “Central Bank Thursday” today we are not expecting much from either the Bank of England or the European Central Bank. The Bank of England is expected to hold rates at 0.5% and asset purchases, quantitative easing, at £225bn. The emphasis of the MPC is to keep policy loose at the moment and we think that another expansion of asset purchase will be announced in February. Members of the MPC will likely be encouraged by upcoming inflation data which should show a significant slowing of price increases as a result of last year’s VAT increase slipping out of the year-on-year basket. The next CPI reading is due Tuesday and will be the last one with the 2.5 percentage point increase in VAT within it.
Similarly we expect the ECB will keep things quiet at their meeting today with only a handful of analysts expecting any movement from the board. We believe that it is too soon after December’s rate cut and launch of the 3yr LTRO and instead we will see Mario Draghi update the market on the performance of the lending operation whilst simultaneously downgrading growth estimates for Eurozone through 2012. Regardless of how quiet the meetings are, we will be live with our monthly webinar, analysing the effects and looking forward over the next few months for the pound.
Alongside the central bank announcements we have UK industrial and manufacturing production at 09.30. These are likely to be poor given the decrease in manufacturing that we have seen in developed economies through Q4 and the UK is no exception to this. The good data could continue in the form of US retail sales this afternoon however; sales are expected to have rallied by 0.3% in the month of December.
We also have bond auctions from Italy and Spain this morning with the former selling short term paper, no longer than a year, and Spain looking at 3yr money.
Indicative Rates Sell Buy
GBPEUR 1.2013 1.2040
GBPUSD 1.5285 1.5310
EURUSD 1.2707 1.2731
GBPJPY 117.52 117.79
GBPAUD 1.4832 1.4848
GBPNZD 1.9214 1.9222
GBPCAD 1.5559 1.5590
NZDUSD 0.7945 0.7964
GBPZAR 12.34 12.39
USDZAR 8.0692 8.1013
GBPPLN 5.3504 5.3781
EURJPY 97.73 97.99
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