ECB Tries To Put The Genie Back In The Bottle

Shaq Genie Kazam

The sun has risen today and Italy is still there and so is Europe and monetary union, despite concerns about a point of no return being passed or some Rubicon has been crossed.  The combination of an acceptable Italian T-bill auction and apparently stepped up ECB buying has seen the Italian debt market recover some of yesterday’s drubbing. The 10-year (generic) yield is off 30 bp today to just below 7% and the 2-year yields is off almost 80 bp to 6.40%.  Note also this reflects a re-steepening of what was an inverted yield curve. This has helped stabilise the euro and the non-dollar currencies more broadly. 

The Italian 1 year bill auction saw the yield rise to almost 6.09% from 3.57% last month.  However there are two other considerations that mitigate the outcome.  First, the yield for the 1-year bill in the cash market was over 8% and the bid-cover was nearly 2:1. 

It is difficult to know how much ECB bought, but we’ll learn this on Monday when they announce the size of its sterilization operation. It would not be surprising to learn that the ECB ramped up their buying.  Recall last week the ECB bought about 9.5 bln euros of sovereign bonds, which was more than the previous two weeks combined. Back of the envelop estimate would put the buying in the 15-20 bln euro range.As the amount the ECB purchased, the stock of holdings rise, and the ECB cuts interest rates (again next month, I think), the sterliization operation may get more technically difficult and will attract greater scrutiny. 

France and Italy reported industrial production figures that leave little doubt about the fragility of the situation.  In France, September industrial output fell 1.7%. The market had expected a 0.7% decline. In August, industrial output rose 0.5% in Aug.  Manufacturing led the decline with a 1.6% fall and this reflected a particularly sharp drop auto output. 

Italy’s industrial production fell 4.8% and the market had expected a 3% decline.  Adding insult to injury, the August rise was revised to 3.9% from 4.3%. 

Japan reported a 8.2% decline in core machinery orders. This was also a larger decline than the market had expected. The yen continues to trade firmly, but it does not reflect an assessment of the Japanese economy. We note that the weekly MOF figures (week to Nov 5), foreign and domestic institutions bought JPY2.8 trillion of Japanese assets. This absorbs roughly 1/3 of the BOJ’s massive intervention on Oct 31. 
Lastly, as widely anticipated the Bank of England left rates and asset purchases alone.  The current asset purchase plan is expected to be completed by February and in Jan or Feb we expect the BOE to announce an another round of purchases. 

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