Euro, Bunds Anticipate Hawkish ECB Commentary on Thursday

How Did the Markets React? 

Economic data out of the Euro-zone today missed expectations, however, the results didn’t prove to be broadly market moving. Bond, forex, and equity trade simply paused on the releases, but subsequently went about their previous price action. Retail sales in the Euro-zone disappointed markets by a relatively large margin in December as the figure posted at 0.3 percent during the month against estimates of a solid rise of 1.1 percent. The predictions were based on robust readings out of Germany, which surged 2.4 percent during the month. Nevertheless, consumption is still anticipated to be supportive of the Euro-zone economy as spending shifts out of retail and more towards the services sector. Meanwhile, factory orders in Germany unexpectedly declined 0.2 percent during the month of December, bringing the annual rate down to 1.7 percent. A breakdown of the data shows domestic orders up 0.2 percent, but foreign orders down 0.4 percent led by a 1.1 percent fall in orders from the Euro-zone. Overall, the data points to a slowdown in growth at the start of this year, however, such a development was widely expected, leaving the European Central Bank on track for a hawkish press conference on Thursday and a March rate hike to 3.75 percent.

Bonds – German 10-Year Bunds

Weaker-than-expected economic data out of the Euro-zone supported prices on 10-year German bund futures throughout the day today as the bonds worked up to a high of 87.84 during the European session. Bunds topped out at that level and held their own until the opening of the US session saw Treasuries drop swiftly, taking German and UK bonds out with them. By the late afternoon in Europe, prices were down .05 to 97.73 with yields 1bp higher at 4.030 percent. Bunds could continue to dip ahead of the ECB’s interest rate decision on Thursday. While the central bank is expected to leave rates steady at 3.50 percent, ECB President Jean-Claude Trichet is likely to use hawkish rhetoric during the subsequent press conference.

German 10-Year Bunds (Intraday)

FX – EUR/USD

The early European session found EUR/USD rallying from the 1.2900 level towards resistance at 1.2950 ahead of expected improvements in Euro-zone retail sales and German factory orders. However, when the releases hit the tape below estimates, EUR/USD gains were cut short as traders evaluated the impact of the data on the European Central Bank’s opinion of the economy, as the central bank meets on Thursday. Euro continued its ascent to probe 1.2950 as the ECB is widely anticipated to leave rates at 3.50 percent, but maintain a staunchly hawkish stance, leaving the door open for monetary policy tightening in March.

EUR/USD (Intraday)

Equities – Xetra DAX Index

European equity markets gained today, with Frankfurt’s Xetra Dax up 0.3 percent to 6,894.18 by mid-day today led by Fresnius Medical Care. The German dialysis provider surged 6.4 percent to 110.29 euros after a US budget proposal on Monday sought to introduce changes in health insurance payments for kidney disease treatment. Meanwhile, E.ON AG, Germany’s largest utility provider by sales, gained 1.3 percent to 110.37 euros. The company has previously issued a takeover bid for Endesa, Spain's largest power company by market value, and Endesa's board of directors are expected to meet today and issue a report on the 41 billion euro deal.

Shares were also given a boost by Euro-zone retail sales. While the figure didn’t meet expectations, consumer spending continued to grow, boding well for the retail sector. However, significantly weaker-than-estimated factory orders out of Germany led to a brief sell-off in the Xetra Dax index.

Xetra DAX Index (Intraday)