Rates to ease from Feb with a soft landing on track
Insight
The ECB meeting came and went with absolutely no change in policy, as expected.
The ECB meeting came and went with absolutely no change in policy, as expected. But also with a whippy Euro, flicked around as ECB President Mario Draghi responded to questions at the press conference on whether the Council discussed extending QE beyond next March and, did they discuss tapering. A firm “NO” on both was the response from the President.
As my colleague Gavin Friend reported overnight, it was because of recent media stories that reported the ECB Governing Council had reached a consensus on tapering QE after the current program ends in March 2017, markets/ journalists (unrealistically) wanted specifics today. That made for a messy and sometimes confusing ECB press conference.
Predictably one of the first questions was about QE extension and Draghi gave a straight “No” (period) to whether the Governing Council had discussed extending it. In subsequent and persistent questioning on the subject an increasingly irritated Draghi pushed back further, saying there was no discussion on tapering and even, “we haven’t really discussed the agenda for the December meeting.” He then said our decisions in December will tell you what we are going to do in coming months, but added, “an abrupt ending to bond purchases is unlikely.”
Draghi’s initial pushback on QE extension discussions and a quip that QE could not last forever were taken as hawkish. EUR/USD popped from 1.0980 to 1.1040, while yields followed before dropping back and then to lower levels as headlines such as the governing council did ’briefly’ touch on negative rates appeared. Dropping to 1.0916 – level with June and March lows, with the Bund yield slumping to zero from a session high of +0.07%. Markets took the combination of the comments of ‘no abrupt end to QE’ and a ‘brief’ discussion of negative rates as an indication the ECB will be extending QE come next March at the same unchanged (EUR80bn) per month levels. EUR/USD is trading at 1.0928 this morning, the German bund yield is 0.003%.
UK retail sales in September unveiled another month of flat sales on the High Street. The market was looking for growth of 0.2-0.3% and sales flat-lined again, this month from a 2.8% decline in clothing sales and prices up 5.2%. So Sterling has pushed up prices after all, it’s now apparent.
While sterling gave back some of its recent gains overnight, at 1.2249 this morning, it’s the AUD that’s now a cent lower than before yesterday’s employment release, buying enthusiasm reversed for now anyway. Next week’s CPI will be another important signpost. The VIX was down 0.6 points to 13.81 overnight, base metals were mostly lower, while the Australian bulk resource export prices are little changed, iron ore up 0.8%, met coal steady and steaming coal -0.1%. Also, oil was lower overnight, WTI and Brent by over 3%, more than $1/bbl.
US data was unlikely to trouble the scorers too much and that’s how it’s panned out. Existing Home Sales were stronger in September (+3.2% after softness the previous two months), while jobless claims were higher at 260K (up from 247K), though likely affected by Hurricane Matthew claims.
US Treasury yields were little changed (2s up 2.4 bps and 10s up 0.5) with the market pricing in a 73% chance of the Fed hiking in December, but there’s only 36 bps priced in total by the end of next year, including the upcoming December meeting, so not even one more for the whole of next year. The market has more than embraced the dovish tilt of US policy and factored in still low inflationary expectations.
Chinese property prices have recently shown signs of re-acceleration and today’s September report will show some further light on that. In August, prices overall were estimated to have risen 1.2%/7.3% after 0.7%/6.4% with 64 of the 70 covered cities reporting that prices had increased in August, up from 51 in July. Further acceleration – should it occur – will only stoke fears that the Chinese authorities will take further steps to cool markets.
First up, there are two NZ releases, net migration at 8.45 AEST and then early this afternoon, NZ credit card spending at 13.00. As far as scheduled data and speeches are concerned, there are two Fed speakers tonight with Fed Governor Powell and San Francisco Fed President John Williams (Yellen’s former head of research when she was SF President and like-minded to Yellen’s dovish monetary policy leanings) both speaking. It’s another potentially important night for the CAD with the key retail sales and CPI monthly reports due.
On global stock markets, the S&P 500 was -0.22%. Bond markets saw US 10-years +0.89bp to 1.75%. In commodities, Brent crude oil -2.49% to $51.36, gold-0.2% to $1,266, iron ore +0.8% to $58.85. AUD is at 0.7629 and the range since yesterday 5pm Sydney time is 0.7625 to 0.7674.
Good luck.
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