A further slowing in growth
I don’t care, I love it was the electro pop song of 2012. So it was with the market reaction to the ECB meeting overnight with the Euro higher (+0.9% to 1.2023) and German Bund yields lower (-4.0bps to 0.31%).
Those moves came despite an explicit nod by the ECB that they would likely announce a taper of the Asset Purchase Program at the upcoming October meeting and some concern over the recent strength in the Euro. It seems the lack of detail and indecision over tapering dominated, while moves in Bunds helped drive down US Treasury yields to their lowest since November (10‑years down 6.6bps to 2.04%).
First up the ECB meeting. As largely foreshadowed by anonymous sources last week, the ECB did not announce a tapering of its €60bn a month Asset Purchase Program that runs until December or beyond if necessary. Instead Draghi noted that the ECB had only held “very preliminary” discussions with an announcement not likely until the 26 October meeting: “we’ll announce when we are ready…we think we have much of what we need in October”. While Draghi noted that many factors were discussed, the lack of explicit detail and perhaps indecision over the timing and scale of tapering has supported a rally in bonds.
The ECB also noted some concern over the currency, noting that “recent volatility in the exchange rate represents a source of uncertainty” with implications for the medium-term outlook for price stability. The recent euro appreciation also saw the staff’s projections of inflation revised down by 0.1% point with 2018 at 1.2% and 2019 at 1.5%. There was some hint of an override in the impact of the higher euro, with it being offset by an improved growth outlook – and the 2017 GDP growth outlook was indeed revised up to 2.2% from 1.9%. Although some fanfare was made of the ECB using a higher Euro assumption of 1.18, it was merely a technical methodology that uses the two week average of the exchange rate to the 14 August.
In the FX space the Euro surged on the news, initially up some 1.1% before settling up 0.9% at 1.2023. Other European currencies were also dragged higher with the Norwegian Krone +0.9% and Swedish Krona +0.8%. The USD in contrast was weaker across the board, with the DXY down 0.6% and at 91.58 is now the lowest we have seen since January 2015. The Yen remains bid (+0.7%) with likely safe haven demand alongside concerns around North Korea. The Aussie (+0.6%) and the Kiwi (+0.4%) were mainly bystanders overnight.
Bond yields were led lower by moves in German Bunds. US Treasury yields fell 6.6bps to 2.04%. Yesterday’s resignation of Fed vice-chair Fischer and the pushing out of the debt ceiling showdown to mid-December are also likely weighing – reducing the chances of a December rate hike. Nevertheless one Fed official remains committed with non-voter Mester noting: “In my view, if economic conditions evolve as anticipated, I believe further removal of accommodation via gradual increases in the fed funds rate will be needed” and that the Fed shouldn’t wait until inflation hits 2% before hiking again.
There was little in the way of significant data. Although US Jobless Claims surged to 298k (245k expected), the 62k increase was likely entirely due to Hurrcaine Harvey with jobless claims up 52k in Texas. A further rise is likely in coming weeks. As we go to print Hurricane Irma is forecast to hit Florida on Sunday. Insurance stocks have been sold ahead of the event with the S&P500 Insurance sub-index down 1.9% against an unchanged broader market (S&P500 0.0%; Euro Stoxx 50 +0.4%).
Finally, the Swedish Riksbank also meet overnight and while there was no change to either rates or their own asset purchase program, the growth outlook was revised higher. Nevertheless, the Riksbank governor noted it would be risky to move ahead of other central banks so it seems we are basically waiting on the ECB to move before we see a change in policy in Sweden. According to current forecasts the Riksbank expects to raise rates in the middle of 2018 (unchanged from last meeting).
It’s quiet in Australia with only Housing Finance Approvals low on the radar (11.30am AEST). The market looks for a 1.0% m/m increase in the number of owner-occupier loan approval; NAB is similar at 1.8% m/m. There are also two RBA speeches which are unlikely to impact on markets too much with Deputy Governor Debelle speaking on ‘Interest Rate Benchmarks’ (1.00pm AEST) and Governor Lowe at the Bank of China Sydney Branch Anniversary (6.30pm AEST).
US Fed speakers will dominate the morning session with Dudley (voter; 9.00am AEST) and George (non‑voter; 10.15am). Dudley is the one to watch given he is seen to be very close to the centre of the FOMC.
Next up and most important is the Chinese trade data released anytime today. Markets look for a slightly slower y/y pace of growth with imports at 10.0% y/y (from 11.0% y/y previously) and exports at 6.0% y/y (from 7.2% previously). The headline trade balance is expected to be in surplus at $48.5bn, marginally higher than the $46.7bn in July. Japan also has the final reading for Q2 GDP along with the July Trade Balance (9.50am AEST). The market looks for a downwardly revised Q2 GDP print of 0.7% q/q from the 1.0% q/q previously indicated.
Canadian employment data (10.30pm AEST) will garner more attention than usual given the Bank of Canada’s hawkish tilt. The market looks for 15k jobs in August and an unchanged unemployment rate at 6.3%. Any data outperformance will likely play into the view of the Bank of Canada hiking rates again – markets fully price another hike by January 2017.
Other pieces of data worth noting include the UK Trade Balance and Industrial Production.
Finally, North Korea is expected to launch an ICBM on Saturday to help celebrate their country’s founding. This is likely to add a bid to safe haven currencies into the weekend.
On global stock markets, the S&P 500 was -0.02%. Bond markets saw US 10-years -6.59bp to 2.04%. In commodities, Brent crude oil +0.59% to $54.52, gold+1.1% to $1,350, iron ore -1.6% to $75.61, steam coal -0.3% to $97.65, met. coal -1.2% to $200.00. AUD is at 0.8047 and the range since yesterday 5pm Sydney time is 0.7975 to 0.8049.
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