ECB: Declining Excess Liquidity Slowly Being Reflected In Money Market Spreads
Feb-14 12:37
The reduction in Eurozone excess liquidity from a high of ~E4.7trln in November 2022 to ~E2.9trln today is slowly being reflected in money market spreads. The ECB considers current levels of excess liquidity to be ample, but will be closely watching developments in funding markets over the coming months. In a speech at the start of November, Executive Board member Schnabel said “there is significant uncertainty about banks’ ultimate liquidity preferences, as well as about the capacity of money markets to efficiently distribute excess liquidity across the euro area”.
- More colour on the ECB’s assessment of balance sheet policy will be provided at MNI’s upcoming event with Executive Board member Cipollone (topic: “The ECB's balance sheet and its implications for monetary policy”). Sign up here.
- A faster pace of monetary policy portfolio contraction (with PEPP reinvestments fully discontinued as of this year) will contribute to further declines in excess liquidity over the next few years. The ECB expects excess liquidity to decline to just above E2trln by the end of 2026, according to staff projections presented by Schnabel.
- One potential measure of excess liquidity ampleness is the spread between the deposit rate and the ESTR overnight rate. This spread has seen a very gradual decline since mid-2023 from just over 10bps to ~8.5bps, but the sensitivity of ESTR to changes in liquidity continues to appear relatively muted.
- The spread between the 6m Euribor fixing and the 6m ESTR swap may be a better gauge of liquidity ampleness, since Euribor rates include a liquidity component. This spread has widened from ~13.5bps in Q1 2024 to ~19bps today, likely reflecting less abundant liquidity conditions.
- Finally, usage of the MRO facility has risen from less than E200mln through 2021 and early 2022 to E9.1bln at the end of last year. This may be a consequence of lower excess liquidity, but is more likely reflective of the narrower corridor between the Deposit Rate and MRO rate as of September 2024 (15bps from 50bps prior).
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US DATA: Mortgage Applications Jump Despite Rates At Highs Since May
Jan-15 12:18
- MBA composite mortgage applications jumped 33% (sa) last week, in the first full week for the year, after a four-week cumulative decline of 25% primarily seen in the last two weeks of December.
- Refis jumped 44% on the week vs -36% over that same four-week period, whilst new purchase applications jumped 27% after a cumulative -18%.
- It’s a strong start to the year but seasonal adjustment can be difficult around the festive period and it’s worth remembering that composite applications are still only 48% of 2019 averages (purchases 63%, refis 33%).
- It comes despite the 30Y conforming rate increasing another 10bps to 7.09% for its highest since May 2024, up from a recent low of 6.19% in late September.
- In a further sign of some relative easing in lending standards, the regular to jumbo spread pushed higher again last week, with the regular rate (7.09%) pushing above the jumbo rate (7.05%) for the first time since Nov 2023.
OUTLOOK: Price Signal Summary - Trend Structure In Bunds Remains Bearish
Jan-15 12:18
- In the FI space, the trend in Bund futures is unchanged, it remains bearish and Tuesday’s fresh cycle low reinforces this theme. The contract has cleared key support at 132.00, the Nov 6 low. The clear break of this level strengthens a bearish theme. Sights are on the 130.00 handle next. Key short-term resistance is at 132.78, the 20-day EMA. Gains would be considered corrective.
- The trend condition in Gilt futures is unchanged, the direction remains down and last week’s fresh cycle lows reinforce current conditions. Recent weakness also highlights an acceleration of the trend. Sights are on 88.87 next, a 2.764 projection of the Dec 20 -27 - Jan 2 price swing. Initial resistance is at 90.31, the Jan 9 high. Resistance at the 20-day EMA, is at 91.61. The EMA is seen as an important hurdle for bulls.
FRANCE: Bayrou Government Looks Set To Survive Censure Vote On Thursday
Jan-15 12:00
PM Bayrou’s government looks set to survive a censure vote on Thursday, alleviating some short-term widening risks in OATs against EGB peers. However, medium-term fiscal and political risks remain prevalent in France, limiting the case for OAT outperformance at this stage. OATs continue to underperform PGBs and SPGBs year-to-date, with the 10-Year SPGB/OAT/PGB butterfly currently at 53bps (vs 52bps yesterday and a cycle closing low of ~56.5bps).
- Bayrou’s address attempted to placate parties across the political spectrum. As a partial concession to the left, Bayrou announced a renegotiation of the 2023 pension reform. Local media has reported that the first debates on this topic will begin on Friday.
- Bayrou also advocated for a move towards proportional representation at the next legislative elections – a notion supported by the right-wing Rassemblement National party.
- The Bayrou government will target a 2025 fiscal deficit of 5.4%. This was at the upper end (though still within) the 5.0-5.5% range touted by Finance Minister Lombard last week. Budget Minister Montchalin has said this will entail E53bln of savings. Montchalin noted this morning that a budget will aim to be presented by the end of January.
- A reminder that ex-PM Barnier’s budget proposal entailed a 5% deficit and E60bln of savings.
- The far-left LFI party proposed a no-confidence motion against the government following the speech (as expected), which will be debated tomorrow at 1500CET and voted on at around 1730CET. It is not expected to succeed in ousting Bayou.
