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Update: 2016-12-08 11:55:25 ET

Moving the Market
  • ECB Monetary Policy Decision: Will buy EUR60 bln/month until December 2017, versus expectations for EUR80 bln/month through September 2017; Deposit rate -0.40%; Main refinancing rate at 0%; Marginal lending facility remains at 0.25%
  • ECB President Draghi's Press Conference: As of January 2017, maturity limit will be reduced from 2 years to 1 years; securities yielding less than the deposit rate (currently -0.40%) can now be purchased, to the extent necessary
  • Initial Jobless Claims for the week ending 12/03: Actual 258K, Briefing.com consensus 255K, Prior 268K
  • Continuing Jobless Claims for the week ending 11/26 (08:30 ET): Actual 2005K, Prior 2081K
  • Natural Gas Inventories for the week ending 12/03: Actual -42 bcf, Expected -43 bcf, prior -50 bcf

12/8/2016
11:10:41 ET
10-Year:-15/32 2.40    GNMAs:     EUR/USD:1.0605    USD/JPY:114.22   

Stocks Sit near All-Time Highs

  • With the European Central Bank's rate decision in the rearview mirror, there are no serious events on the U.S. calendar until next Wednesday's FOMC meeting. Sovereign debt yields have settled down with much steeper yield curves as the EUR20 bln/month reduction in asset purchases beginning at the end of March 2017 and the removal of the deposit rate floor are being taken to heart by investors. We had seen a lifting of the single issuer limit (currently 33%) as more likely than the suspension of the deposit rate floor but Draghi said in his press conference that there were political hurdles to the former. The deposit rate floor stipulates that the program cannot buy securities with yield to maturities lower than the deposit rate, currently -0.40%. The German yield curve is sharply steeper with 2s/30s widening by 20 basis points to 194 bps
  • The S&P 500 is trading at 2,243.1, just below an all-time high
  • The U.S. Dollar Index is up 0.99% to 101.22 as lower short-term rates in the eurozone are seen as euro-bearish
  • WTI crude is up 1.79% to $50.66/bbl.
  • Gold is down 0.42% to $1,172.5/troy oz.
  • Yield Check:
    • 2-yr: unch at 1.10%
    • 5-yr: +3 bps to 1.82%
    • 10-yr: +5 bps to 2.40%
    • 30-yr: +7 bps to 3.10%

 
12/8/2016
10:11:12 ET
10-Year:-17/32 2.40    GNMAs:     EUR/USD:1.0618    USD/JPY:114.05   

Scheduled News Flow Mostly Over for Week

  • Treasuries have settled in with losses after a lot of post-ECB announcement volatility. The 10-year yield is up by six basis points to 2.40% and the S&P 500 is down 0.06% to 2,240.1. The U.S. Dollar Index is up 0.84% to 101.07 and gold is down 0.41% to $1,172.7/troy oz. WTI crude is up 1.17% to $50.35/bbl. 
  • Following ECB President Mario Draghi's press conference, the ECB announced that it would allow the national central banks, who hold the securities purchased by the asset purchase program, to accept cash as collateral in repurchase transactions. The European Central Bank has bought more than EUR1 tln of government bonds and these were the raw material that commercial banks formerly used to access short-term funding markets. The commercial banks would repo out the bonds in return for cash, a transaction that would be unwound in days or weeks ("repo" is short for "repurchase agreement"). Since the ECB's asset purchase program began hoovering up all of the eurozone government bonds, the commercial banks have fewer assets to repo. The ECB now says that it will accept cash as collateral when lending out its bonds. The overall limit will be EUR50 bln
    • To avoid unduly curtailing normal repo market activity, the cash collateral option will be offered at a rate equal to the lower of the rate of the deposit facility minus 30 basis points (i.e. currently -70 basis points) and the prevailing market repo rate
    • The introduction of cash as collateral in the context of PSPP securities lending is intended to enhance the effectiveness of the SL framework, thereby supporting the smooth implementation of the PSPP as well as the euro area repo market liquidity and functioning
  • Yield Check:
    • 2-yr: +1 bp to 1.11%
    • 5-yr: +4 bps to 1.83%
    • 10-yr: +6 bps to 2.40%
    • 30-yr: +7 bps to 3.09%

 
12/8/2016
9:25:57 ET
10-Year:-11/32 2.38    GNMAs:     EUR/USD:1.0629    USD/JPY:114.02   

ECB Reaction Gets Unwound

  • After trading as high as 0.47%, the 10-year German bund yield is now up just 2 basis points to 0.37%. Treasury prices have rebounded in sympathy to their pre-ECB levels . The S&P 500 is set to open down one point to 2,240.3 and the U.S. Dollar Index is up 0.77% to 101.01. Gold is down 0.33% to $1,173.6/troy oz. and WTI crude is up 0.94% to $50.24/bbl.
  • Draghi said during the press conference that there has been no discussion of ending the asset purchase program and that raising issuer limit (currently 33%) would be difficult
  • The removal of the deposit rate floor by the ECB should help to keep the German yield curve steeper. In the press conference, ECB President Draghi said that the asset purchase program will only buy securities yielding less than the deposit rate (currently -0.40%) if necessary. It is hard to tell just what that means
  • Yield Check:
    • 2-yr: +1 bp to 1.11%
    • 5-yr: +2 bps to 1.81%
    • 10-yr: +3 bps to 2.37%
    • 30-yr: +5 bps to 3.07%

 
12/8/2016
8:55:11 ET
10-Year:-19/32 2.41    GNMAs:     EUR/USD:1.0640    USD/JPY:114.34   

Deposit Rate Floor Removed for ECB Asset Purchases

  • U.S. Treasuries are sharply lower today and the yield curve is steepening after ECB President Draghi said that the deposit rate floor for the central bank's asset purchase program would be suspended as of January 2017. That restriction on the program, that did not allow the purchase of securities yielding less than -0.40%, served to force the PSPP to buy longer-dated paper and thereby flattened the yield curve. The removal of the floor should have the opposite effect and that should steepen the U.S. yield curve as well as those of eurozone countries
  • The S&P 500 is set to open down 0.09% to 2,239.1 despite a lot of volatility in interest rate markets. The U.S. Dollar Index is up 0.66% to 100.89 as an initial sell-off in the greenback failed to follow through
  • Gold is down 0.46% to $1,172.2/troy oz. as the dollar strengthens and WTI crude is up 0.84% to $50.19/bbl.
  • ECB President Draghi said this morning that the central bank's asset purchase program will undergo some technical changes as of January 2017. First, the program will now be allowed to purchase securities that yield less than the deposit rate (currently -0.40%). Also, the maturity minimum will be lowered from two years to one year
  • Draghi said that a broad consensus of the Governing Council supported the move to reduce asset purchases to EUR60 bln/month and extend the program for nine months as opposed to maintaining the purchase rate at EUR80 bln/month and extend for only six months
  • ECB staff growth projections:
    • 2016: 1.7% (1.6%)
    • 2017: 1.7% (1.7%)
    • 2018: 1.6% (1.7%)
  • ECB staff inflation projections:
    • 2016: 0.2% (0.2%)
    • 2017: 1.3% (1.6%)
    • 2017: 1.5% (1.6%)
  • In the U.S., initial jobless claims fell to 258K for the week ending December 3 from 268K in the prior week. The Briefing.com consensus was 255K
    • Continuing jobless claims fell to 2005K for the week ending November 26 from 2081K in the prior week
  • Yield Check:
    • 2-yr: +3 bps to 1.13%
    • 5-yr: +6 bps to 1.85%
    • 10-yr: +8 bps to 2.42%
    • 30-yr: +9 bps to 3.12%

 
12/8/2016
8:10:38 ET
10-Year:-17/32 2.40    GNMAs:     EUR/USD:1.0753    USD/JPY:113.94   

European Yields Jump as Asset Purchases Will Taper to EUR 60 Bln/Month After March 2017

  • European sovereign yields are trading broadly higher this morning after the ECB's Governing Council announced that the asset purchase program would be extended for three months more than expected but at a 25% smaller amount than expected. After the previously scheduled expiration date of the program at the end of March 2017, the ECB will buy only EUR60 bln/month but will do so until December of 2017. Analysts had been expecting a six-month extension at the current pace of EUR80 bln/month. The deposit rate remains at -0.40%, where the accompanying statement says it will remain past the time that the asset purchases are completed.  The main refinancing rate remains at 0.00% and the marginal lending facility rate will stay at 0.25%
    • Some analysts are doing the simple math and saying that since 9x60 = 540 and 6x80 = 480, this extension is better than the 6-month extension at the current EUR80 bln/month pace that analysts had expected. The problem with that thinking is that the chatter from ECB policymakers this fall has been that the ECB would definitely taper before ending the program. This announcement, therefore, opens up the possibility that the program will expire completely at the end of 2017. Had the Governing Council decided on a six-month extension at the current pace, there surely would have been a tapering period after September 2017
  • European Economic Data:
    • French nonfarm payroll growth was confirmed at 0.3% q/q for the third quarter, in line with the preliminary estimate but up from Q2's 0.2% growth
    • Greece's unemployment rate fell to 23.1% in September from 23.3% in August
  • Yield Check:
    • France, 10-yr OAT: +6 bps to 0.87%
    • Germany, 10-yr bund:  +10 bps to 0.44%
    • Greece, 10-yr note: -6 bps to 6.55%
    • Italy, 10-yr BTP: +13 bps to 2.02%
    • Portugal, 10-yr PGB: -3 bps to 3.59%
    • Spain, 10-yr ODE: +11 bps to 1.53%
    • U.K., 10-yr gilt: +6 bps to 1.29%

 
12/8/2016
7:48:44 ET
10-Year:-18/32 2.40    GNMAs:     EUR/USD:1.0820    USD/JPY:113.85   

Slower for Longer

  • The European Central Bank's Governing Council has extended the asset purchase program to December of 2017 BUT will reduce monthly purchases to EUR60 bln/month after March 2017
  • The program will be extended if the outlook becomes less favorable
  • The Governing Council saw a sustained adjustment in the path of inflation consistent with its goals
  • U.S. Treasuries from the 5 to 30-year maturities are sharply lower after the announcement. The U.S. Dollar Index is a bit softer, down 0.36% to 99.87 after having traded as low as 99.43
  • Yield Check:
    • 2-yr: +3 bps to 1.12%
    • 5-yr: +5 bps to 1.84%
    • 10-yr: +6 bps to 2.40%
    • 30-yr: +7 bps to 3.10%

 
12/8/2016
7:32:54 ET
10-Year:-8/32 2.37    GNMAs:     EUR/USD:1.0793    USD/JPY:113.41   

Treasuries Slide Ahead of ECB Decision

  • U.S. Treasuries are trading lower this morning ahead of the monetary policy decision from the European Central Bank's Governing Council (07:45 ET). A comprehensive review of the ECB's monetary easing measures has been completed and should encourage the Governing Council to extend the EUR80 bln of monthly asset purchases by six months, according to most analysts. Any significant tapering before September 2017 (when the program would end after a six-month extension) could shock markets but EUR10 bln/month off of the current pace of EUR80 bln/month might not be the end of the world. Concerns at the ECB over the effect of extremely low and flat yield curves for eurozone interest rates should have been allayed somewhat since the sharp upward move in sovereign yields following the November 8 U.S. election. Technical tweaks to the ECB's program to allow practical implementation of the asset purchase program are also possible. The most likely change would be an increase in the issuer limit of 33%, while less likely would be the removal of the deposit rate floor (currently -0.40%) , and then the abandonment of the capital key. The economic data overnight showed a sharp narrowing of China's trade surplus and a downward revision to Japan's GDP growth for Q3. The S&P 500 is set to open down 0.10% to 2,239.1 and the U.S. Dollar Index is down 0.33% to 99.90. WTI crude is up 0.86% to $50.20/bbl. and gold is up 0.20% to $1,179.8/troy oz.
  • Yield Check:
    • 2-yr: +1 bp to 1.11%
    • 5-yr: +3 bps to 1.82%
    • 10-yr: +3 bps to 2.37%
    • 30-yr: +4 bps to 3.06%
  • International News:
    • China's trade surplus narrowed more than expected to $44.61 bln for November from $49.06 bln in October
      • Exports, which had been expected decline again after falling 7.3% y/y in October, ticked up by 0.1%
      • Imports unexpectedly jumped by 6.7%y/y, beating both expectations and October's 1.4% drop
    • Japan's Q3 GDP growth was revised down to 0.3% q/q (1.3% y/y)from the preliminary estimate of 0.5%. Q2 growth was just 0.2%
      • Private consumption was up 0.3% q/q in Q3, the same pace as Q2
      • Bank lending in Japan was up 2.4% y/y in November, in line with both estimates and the October growth rate
      • Japan's Economy Watchers Current Index jumped to 52.5 for November from 49.3 for October, beating expectations for a decline
    • Australia's trade deficit unexpectedly widened to AUD1.54 bln for October from AUD1.27 bln for September
    • French nonfarm payroll growth was confirmed at 0.3% q/q for the third quarter, in line with the preliminary estimate but up from Q2's 0.2% growth
    • Greece's unemployment rate fell to 23.1% in September from 23.3% in August
  • Data out Thursday:
    • ECB Monetary Policy Decision (07:45 ET)
    • ECB President Draghi's Press Conference (08:30 ET)
    • Initial Jobless Claims for the week ending 12/03 and Continuing Jobless Claims for the week ending 11/26 (08:30 ET)
    • Natural Gas Inventories for the week ending 12/03 (10:30 ET)

 
12/7/2016
3:31:18 ET
10-Year:+13/32 2.34    GNMAs:     EUR/USD:1.0765    USD/JPY:113.80   

Treasuries End Higher Ahead of ECB Decision

  • U.S. Treasuries traded higher today despite a surge in global equity markets as WTI crude fell 1.94% to $49.94/bbl. The U.S. economic data was very light but consumer credit expanded more than expected in October and job openings fell less than expected during the same month. The MBA Mortgage Market Index fell to its lowest level since January while the average 30-year mortgage rate rose to its highest since October of 2014, when plummeting oil prices began to send bond yields and mortgage rates lower. The monetary policy decision of the European Central Bank's Governing Council is due out Thursday morning. The U.S. Dollar Index is down 0.31% to 100.18 and the S&P 500 is up 1.23% to 2,239.3
  • Yield Check:
    • 2-yr: -3 bps to 1.09%
    • 5-yr: -4 bps to 1.80%
    • 10-yr: -5 bps to 2.34%
    • 30-yr: -6 bps to 3.02%
  • News:
    • JOLTS - Job Openings fell to 5.534 million in October from 5.631 million in September, indicating less slack in the labor market
      • The private quits rate was steady at 2.1%, job openings were 3.7%, and the hiring rate was 3.5%. The layoffs and discharges rate was unchanged at 1.0%
    • MBA Mortgage Index for the week ending 12/03: Actual -0.7% w/w, Prior -9.4%
      • Average 30-year mortgage rate: Actual 4.27%, Prior 4.23%
    • Total outstanding consumer credit increased by $16.0 bln in October (Briefing.com consensus $18.7 bln) after increasing an upwardly revised $21.8 bln (from $19.3 bln) in September. Taking the revision into account, then, consumer credit growth in October was largely in-line with expectations
      • The key takeaway from the report is that consumer credit -- both revolving and nonrevolving -- continues to expand, which is a supportive element for the U.S. economy
      • The growth in October was powered once again by a $13.7 bln increase in nonrevolving credit, which rose to $2.75 trillion. Revolving credit increased by $2.3 bln to $981 bln
  • Commodities:
    • WTI crude: -2.02% to $49.90/bbl.
    • Gold: +0.47% to $1,175.6/troy oz.
    • Copper: -1.25% to $2.6465/lb.
  • Currencies:
    • EUR/USD: +0.43% to 1.0765
    • USD/JPY: -0.27% to 113.80
  • Data out Thursday:
    • Initial Jobless Claims for the week ending 12/03 and Continuing Jobless Claims for the week ending 11/26 (08:30 ET)
    • Natural Gas Inventories for the week ending 12/03 (10:30 ET)