How much stimulus will the ECB serve up?

At its last meeting in July, the European Central Bank all but committed itself to delivering a package of easing measures as it battles to spark growth and drive up stubbornly low inflation.

Markets responded accordingly, pricing in rate cuts as well as a reactivation of the bond-buying programme that was wound down last December. Two-year government bond yields, which are highly sensitive to interest rate expectations, are below the ECB’s current deposit rate of minus 0.4 per cent in nearly all eurozone markets.

Mario Draghi, the ECB’s soon-to-depart president, has a tough job on his hands to exceed market expectations — particularly given the doubts about the need for further quantitative easing expressed in recent days by his colleagues on the ECB’s governing council. But some analysts think he will.

“We expect an aggressive easing package from the ECB,” said Priya Misra, head of global rates strategy at TD Securities in New York. TD thinks the ECB will cut rates twice, by 0.1 percentage point this Thursday and again at Christine Lagarde’s first meeting as president in December, while announcing €40bn of new monthly bond purchases.

That should be enough to drive bond yields lower still, according to Ms Misra, who is expecting Germany’s 10-year yield to end the year at minus 0.8 per cent compared with minus 0.61 per cent currently.

A smaller package of purchases could disappoint bond investors. Axa chief economist Gilles Moëc thinks Mr Draghi will compromise with his more sceptical colleagues and opt for €25bn of monthly purchases for the next six months, particularly given growing doubts about the effectiveness of more agressive easing.

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A programme of that size would probably allow the ECB to avoid the politically tricky step of raising the limit on how much of each country’s bonds it can own, currently set at 33 per cent.

“I’m not sure the balance is right for a bazooka right now,” Mr Moëc said. Tommy Stubbington

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Will the deluge continue in US bond markets?

After a record-breaking week in the US for investment-grade bond sales, investors are asking whether the market can sustain the rapid pace of issuance, and what the deluge of debt might do to corporate borrowing costs.

Investors lapped up a total $74bn worth of investment grade bonds for the week ending September 6, according to Bloomberg data, the most ever — both by the sheer number of deals and the dollar value of the total.

The slew of sales comes after a global bond rally that has pushed prices so high, and yields so low, that the total amount of negative-yielding debt around the world has soared to around $16tn. The US has been luring foreigners by offering relatively high returns on its debt, according to bankers and investors.

Bank of America analysts note that many of the new bond sales have been used to pay down other debt while lengthening maturities, without adding to the overall leverage of many companies. That means that the total pool of bonds is not increasing.

Nonetheless, analysts and bankers expect the selling frenzy to continue, noting that September tends to be the busiest month for the corporate bond market all year. Joe Rennison

Will the US crop report produce another surprise?

After a shocking report in August, analysts will be watching to see if the US Department of Agriculture’s monthly update on crop progress, due on Thursday, yields any further surprises.

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Larger than expected corn supply forecasts from the USDA last month upset the market, pushing the futures price in Chicago down 6 per cent in the largest daily sell-off in six years.

Despite record rainfall earlier in the year, which turned many fields across the Midwest into lakes, the USDA predicted just a 4 per cent drop from 2018’s average yield to 13.9bn bushels. This was much higher than average private estimate of 13.2bn bushels.

Analysts and traders were taken aback by the planted area of 90m acres, which was higher than the top range of consensus estimates, but also the yield, or output per acre, at almost 170 bushels.

For the August report, the USDA made a change to the way it gathers data by eliminating its on-field “objective” survey. Instead, it relied on phone and online surveys of 21,000 growers.

This month’s report will include the on-field survey, and traders will be looking to see whether the yield forecasts change as a result. “The market will have to accept the large 90m acres planted in the US, which is a key bearish factor,” said analysts at Rabobank. But if yield estimates rise further, “prices would further be pressured,” it said.

On the other hand, a fall in the yield could help corn prices. But downgrades to the forecast would have to be substantial for the market to rise above $4.50 a bushel, from the current $3.45, the bank added. Emiko Terazono

Via Financial Times