European Bond Market Preview 2/20

- In thin trade ahead of the holiday in the US, European government bonds closed lower in yesterday’s session.
- The focus in today’s session will fall upon German producer price data and preliminary Q4 GDP data in France, due out at 2:00 ET and 2:45 ET respectively. German prices are seen rising from December, but are expected to fall compared to last year, while French GDP is expected to show gains on both a Q/Q and Y/Y basis.
- The Bundesbank released its monthly report overnight, noting that the Euro’s gains helped to dampen inflation in recent months. The Bundesbank said that it still sees risks from wages, and noted that the impact of the VAT hike has not yet been fully reflected.
- The ECB’s Trichet reiterated overnight that price stability is a key to growth in the Euro-Area, pointing out that stable prices have helped to create jobs as well. Trichet also said that the ECB’s credibility has anchored lower inflation expectations.
- Gilts closed lower in the UK yesterday on thin trade ahead of the gilt auction scheduled in today’s session.
- The focus in today’s session will be preliminary M4 money supply data for the month of January, which is expected to fall on both a M/M and Y/Y basis. The preliminary M4 data is scheduled for release at 4:30 ET. Additional focus will fall upon the DMO’s gilt auction. The UK DMO is set to sell £1B in 1 1/8% 2037 gilts. Auction results are expected shortly after 5:30 ET.
- In a submission to the UK Treasury Committee the Bank of England made some comments yesterday. Most notably the BOE said that the low level of real rates looks unsustainable, pointing out that it is unwise to ignore money supply entirely, furthermore pointing out that the accumulation of household debt may complicate future monetary policy. The BOE also said that CPI has been low and unusually stable in the UK since the BOE began targeting inflation. The BOE said that some depreciation of the real exchange rate may be necessary in order to close the current account deficit. Finally the BOE said that policymakers may raise rates and undershoot the CPI target in the near-term as an attempt to mitigate the current situation.