The FOMC sent a diffuse messages to markets

Yesterday, the FOMC sent a diffuse messages to markets. First, they continue the tapering with a confirmed ending in October. Second, there was an eye-catching increase of the Fed fund rate projections (dots). Third, the forward guidance “considerable time” is unchanged in the statement but later downplayed by Fed chair Yellen in the Q&A. Overall, we assess the Fed meeting as moderately hawkish (see FLASH). On the Treasury market, the yield curve shifted higher, with the 5-yr, the sector most sensitive to an upcoming tightening cycle, hit the hardest. Yields increased by 5.6 bps at the 5-year, 3 bps at the 2-year and respectively 2.7 and 0.8 bps at the 10- and 30-yr tenor.

US initial jobless claims are forecast to have dropped again in the week ending the 13th of September, following a significant pick-up in the previous week, when claims were probably distorted by the Labour Day holiday. The consensus is looking for a decline from 315 000 to 305 000. We have no reasons to distance ourselves from the consensus. The Philly Fed index is forecast to have dropped slightly in September, from 28 to 23, after jumping to a 3.5-year high in August. Despite the strong headline reading, the details of the August report were quite poor, with growth in both production and new orders slowing significantly, which indeed suggests that the headline reading might drop somewhat lower this month. Finally, both US housing starts and permits are forecast to have dropped in August after jumping sharply in July. Permits are expected to drop by 1.6% M/M following a 8.6% M/M increase in July, while starts are forecast to show a bigger 5.0% M/M decline (from 15.7% M/M the month before). Recently housing starts and permits have been volatile and we expect this pattern to continue in August.

The ECB holds its first 4-yr TLTRO tender. The ECB announced this new type of lending to financial institutions at the June meeting. The borrowing limits for each institution are based on the outstanding size of some types of loans to the private sector on April 30, 2014. The borrowed money needs to be used for new lending to the private sector. If banks fail to fulfil certain criteria of usage, they will have to pay back the ECB loan after two years, but without penalty. So, the TLTRO aims to stimulate the economy and not to use the money to buy government bonds as happened with the 3-year LTRO loans. To raise the attractiveness for banks, the repo was lowered to 0.05% in September. So, for the first TLTRO banks will pay 15 bps fixed for 4-yr money. Mr Draghi said at the September 2014 meeting that the ECB expects the TLTRO together with ABSPP and CBPP, to boost the ECB balance sheet to levels of early 2012 (about €3T from about €2T currently).

This looks too ambitious, as about €350B 3-yr LTRO loans will mature early 2015 and 148B SMP bonds gradually mature. Markets will look closely to the amount banks demand. According to the Reuters consensus banks will ask for €133B TLTRO loans, while the Bloomberg consensus is higher at €167B. In December, there will be a second TLTRO based on the April 2014 bank balance sheet. Most observers expect a bigger demand at the December tender. The TLTRO will influence liquidity conditions. Currently the excess liquidity is close to €100B. The TLTRO tender should boost excess liquidity but it is unclear by how much, not only because the take-up is not known, but also because banks may start paying back more outstanding LTRO loans or ask less liquidity at the weekly MRO (and SMP bonds mature). We have no strong view on the demand for TLTRO loans, but it should be enough to push excess liquidity up to above €150B and keep eonia in negative territory, likely deeper than the -1-to-2 bps of recent. A take-up of below €100B may question the overly ambitious goal of boosting the balance sheet to €3T. While it shouldn’t directly have implications for eonia, it might raise expectations that yet another, full blown, QE will prove inevitable.

Today, the Spanish treasury launches a new 3-yr Bono (0.5% Oct2017) for €2.5-3.5B. If demand is good though, they won’t hesitate to print a larger amount. Grey market trading indicates that the bond offers a 4.5 bps pick-up in ASW spread terms compared to the previous 3-yr benchmark (2.1% Apr2017). This corresponds with a 6 bps pick-up in yield. The French debt agency taps the on the run 2-yr BTAN (0.25% Nov2016), the off the run 5-yr BTAN (1% May2019) and on the run 5-yr BTAN (0.5% Nov2019) for a combined €7-8B. Additionally, they’ll raise €1-1.5B via inflation-linked bonds. Currently, Spain and France respectively completed 81% and 72% of this year’s expected issuance. Overall, we expect both auctions to go well.

Overnight, most Asian equity markets trade positive with Japan outperforming on the back of a weaker yen. There are rumours that the PBOC cut its repo rate to a three-year low. The US Note future trades stable near yesterday’s low reached following the slightly hawkish FOMC meeting. This suggests a slightly lower opening for the Bund.

Today’s market calendar is interesting with the first TLTRO. A low take-up (<€100B) would question the credibility of the ECB’s promise to substantially increase her balance sheet. It would also immediately amplify the call for outright QE and thus be a positive for the German Bund. The reverse reasoning goes for a large take-up (>€200B). In the US, we have jobless claims, housing data and Philly Fed indicator. Following the outcome of yesterday’s meeting, US eco numbers will only gain in importance. We expect a mixed outcome though today. Finally, Fed Yellen and Fisher speak. The latter can immediately grab the opportunity to give more explanation to his dissenting vote.

Technically, the US 10-yr yield is testing 2.6% resistance following yesterday’s moderately hawkish Fed meeting. We believe that risks for a break are high, especially if eco data confirm ongoing strength in the US. Next resistance stands at 2.8%. The US Note future tested the first target of the double top (123-23+). We think there is more downside with the second target of the double top at 123-10. The German 10-yr yield faces first resistance at 1.12%. Higher US yields should have a ripple effect on German yields. A weak TLTRO might hamper this effect, while a strong TLTRO pick-up should strenghten it.