QE started: will this improve economic conditions in the EZ?

1. EDITORIAL

The European Central Bank didn’t shy away from the region’s riskier securities when it began buying corporate bonds on last Wednesday, 8th June.

The Central Banker is showing he’s planning to make the biggest impact possible on the first day of corporate bond purchases by casting his net as wide as the program allows.

While the ECB has said it would buy corporate bonds with a single investment-grade rating, some investors expected the central bank to start with the region’s highest-rated securities. In fact the buying programme spread also on some sub-investment grade names and corporations.

To name a few: Telecom Italia S.p.A. and Telefonica SA, respectively the Italian and Spanish phone carriers, and Assicurazioni Generali, Italy’s biggest insurer.

Investors have snapped up investment-grade corporate bonds on the promise of central bank purchases, driving up prices and cutting borrowing costs. The average yield for IG euro notes tumbled under the limit of 1% to 0.98% and the junk bonds have also rallied, with the average yield falling to a one-year low level of 4.64%, indices show.

The expectation was that the ECB would focus mainly on bonds of the core countries of the Eurozone, such as France and Germany, but this signal on Peripherals countries and their bonds could turn positive for this economies if this buying trend will keep also on the next purchases’ windows.

On the other hand this action by the central banker highlights that he cannot be too picky if he wants to make an impact on the Eurozone and push the economies out of this deflationary spiral.

This dynamic has influenced the European market so much already that it’s pushed down some corporate-debt borrowing costs to record lows as previously highlighted.

And much more. What we are experience for government bonds, negative yields, it’s starting showing also on some corporate names as some company bond yields have turned negative, in particular for those companies whose debt is seen as a likely ECB target.

It has been unheard of to pay a corporation to borrow money, and yet here we are.

The ECB’s move has also contributed to a decline in U.S. corporate-debt yields, albeit not as much as in Europe.

This latest effort of corporate-bond buying, which has the ECB adding investment-grade corporate notes to its 80 Billions EUR monthly purchase program, hasn’t lifted the agency’s own longer-term inflation expectations at all.

Earlier this month, the central bank released new euro-zone growth predictions that were lower in 2018 than its previous forecast.

The gap between yields on euro-denominated investment-grade and high-yield bonds has narrowed but is still well above the lows of 2014.

While the ECB appears to be struggling to buy enough government debt of certain nations, that challenge is magnified significantly in the corporate-debt market. It has already caused significant distortions and will most likely continue to do so.

What happened on the other markets the last days is something that is putting on hold all growth estimates globally. Gold received a bid higher after employers in the U.S. added just 38k workers – well below estimates and the fewest in almost six years. More concerning were the revisions for employment gains in April and March were lower by a combined 59k jobs (see figure XX).

The dilemma facing the Fed is that while the unemployment rate fell to 4.7% (below consensus), suggesting it should tighten policy. It seems the Fed are more likely to delay hiking rates in June (probability of a June rate hike currently stands at 4%) over uncertainty of whether Friday’s weaker payroll data reflected the wider trend in the US economy or just an anomaly. In light of the upcoming EU referendum and Spanish elections, we expect volatility to remain elevated and should help gold prices move higher.
Cristian Rusconi

2. DATA TO WATCH

US

• 14th June: NFIB Small Business Optimism
• 14th June: Import Price & Retail Sales
• 14th June: NFIB Small Business Optimism
• 15th June: MBA Mortgage Applications
• 15th June: PPI Final Demand
• 15th June: Empire Manufacturing
• 15th June: Industrial Production & Capacity Utilization
• 15th June: FOMC rate decision
• 16th June: Initial & Continuing Jobless Claims
• 16th June: CPI MoM & YoY
• 16th June: NAHB Housing Market Index
• 16th June: Bloomberg Consumer Comfort
• 17th June: Housing Starts & Building Permit

EU

• 14th June: Industrial Production MoM & YoY [EZ]
• 14th June: Employment QoQ & YoY [EZ]
• 15th June: CPI MoM & YoY [FRA] & Trade Balance MoM & YoY [EZ]
• 16th June: CPI MoM & YoY [EZ]
• 17th June: Trade Balance [ITA]
• 21th June: ZEW Survey Expectations [EZ] & ZEW Survey Expectations & Current Situations [GER]
• 22nd June: Consumer Confidence [EZ]
• 23rd June: Markit Manufacturing PMI, Services PMI, Composite PMI [EZ]
• 24th June: IFO Business Climate, Current Assessment, Expectations [GER]
• 24th June: Retail Sales MoM & YoY [ITA]
• 27th June: Retail Sales MoM & YoY [GER]

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