Macro: Sandcastle economics
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Fixed income market: the week ahead
Althea Spinozzi
Head of Fixed Income Strategy
Summary: In the United States, the rise in Treasury yields might slow down this week if violent protest escalates during the Presidential inauguration. In Europe, a political crisis in Italy, Netherlands, and Estonia may force the European Central Bank to tweak the Pandemic Emergency Purchase Programme (PEPP) favouring certain sovereigns. In our opinion, Italian BTPs continue to offer the most significant upside ahead of Thursday ECB's meeting even if the government is running the risk of earlier elections.
Although it will be a short trading week in the United States, everything can happen as Joe Biden is sworn as President. The reflation story will most likely continue to push Treasury yields higher; however, if violent protest escalates, there could be some upside for Treasuries in the short-term.
In Europe, investors will need to carefully consider opportunities in the European sovereign space before the ECB meeting on Thursday as political hurdles arise in various countries. The trading week will also be influenced by news from the European financial ministers' meeting and the German and Eurozone ZEW Survey coming out tomorrow.
It will be essential to examine Lagarde's wording at the European Central Bank’s press conference on Thursday as a political crisis unfolds in Italy, Netherlands and Estonia. Although in the last ECB's minutes was mentioned a possible rate cut if the bloc's economic outlook continues to deteriorate, we don't believe that there are yet elements for the ECB to take such a decision. The central bank will most likely maintain its policy on hold and use the Pandemic European Purchase Program to weight purchases towards selective countries to control a spike of spreads against the Bund.
Therefore, we believe that the volatility in Italian sovereigns, which saw the BTP-Bund spread widening in the past week, offers an excellent buying opportunity as the Italian BTPs will continue to be supported by the expansionary monetary policies of the ECB. Today and tomorrow Italy's Prime Minister Conte will seek to form a new majority in the lower house and the Senate. Suppose he fails to gather enough votes to form a new government. In that case, early elections will be called, which would see the BTPs falling further, representing a greater opportunity for bond investors ahead of the ECB meeting on Thursday.
While the upside in long-term BTPs can be substantial, we believe that such an upside is almost inexistent for Dutch government bonds for the simple reason that they are already trading in deeply negative yield territory. The Dutch 10-year sovereigns (NL0014555419) are offering -0.48% in yield, and the spread between the Netherland government bonds and the Bunds is the tightest since before the Global Financial Crisis in 2008 indicating that there is very little room for further tightening. The spread between Italian BTPs and the Bund, on the contrary, is quoting around 2016 levels. Due to the expansionary accommodative monetary policies of the ECB, the spread between BTPs and the Bund could fall to 75bps, a level previously hit in 2010. If that were the case, it would translate in an upside of approximately 4% and 16% for 10- and 30-year BTPs respectively.
Monday, January 18th
- United States: Martin Luther King’s Birthday
- China: Gross Domestic Product, Retails Sales, Industrial Production
- Japan: Industrial Production
- Italy: Consumer Price Index
- Eurozone: Eurogroup Meeting
- Germany: Deutsche Bundesbank Monthly Report
- New Zealand: NZIER Business Confidence
Tuesday, January 19th
- Australia: Housing Industry Association New Home Sales
- Eurozone: EcoFin Meeting, ECB Bank Lending Survey, ZEW Survey – Economic Sentiment
- Germany: Harmonized Index of Consumer Prices, ZEW Survey – Economic Sentiment and Current Situation
- United Kingdom: BOE’s Haldane Speech
- Australia Westpac Consumer Confidence
Wednesday, January 20th
- China: PBoC Interest rate Decision
- United Kingdom: Consumer Price Index, PPI Core Output, Retail Price Index
- Germany: Producer Price Index, 30-year Bond Auction
- Eurozone: Consumer Price Index
- Canada: BOC Consumer Price Index, BOC Rate Statement, Bank of Canada Monetary Policy Report, BOC Interest Rate Decision and Press Conference
- United States: 20-year Bonds auction
- Japan: Merchandise Trade Balance
Thursday, January 21st
- Eurozone: EU Leaders Summit, ECB Interest and Deposit Rate Decision, ECB Monetary Policy Statement and Press Conference, Consumer Confidence
- Australia: Consumer Inflation Expectations, Employment Change, Unemployment Rate
- Japan: BOJ Monetary policy Statement, Interest Rate Decision and Press Conference
- United States:Building Permits, Housing Starts, Initial Jobless Claims, Philadelphia Fed, Manufacturing Survey, 20-year TIPS auction
- New Zealand: Consumer Price Index
- Australia: Commonwealth Bank Manufacturing PMI
- Japan: National Consumer Price index
Friday, January 22nd
- United Kingdom: GfK Consumer Confidence, Retail Sales Markit Manufacturing and Services PMI
- Australia: Retail Sales
- France: Markit Manufacturing, Servicesand PMI Composite
- Germany: Markit Manufacturing, Servicesand PMI Composite
- Eurozone: Markit Manufacturing, Servicesand PMI Composite
- United States: Markit Manufacturing, Servicesand PMI Composite
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