March 10, 2017

Markets Today: ECB Creaking Door

As expected the ECB left its key interest rates and QE programme unchanged, but a more optimistic Draghi has helped the EUR performed and it has also pushed bond yields higher.

Commodities have remained under pressure and it has been the key driver of AUD underperformance and other commodity linked currencies.

The ECB statement and forecasts had no major surprises and resulted in a fairly muted reaction by the market. The forward guidance in the statement was unchanged (“interest rates will stay low, or lower for an extended period of time”) and the only notable tweak in the forecasts was the 2017 inflation uplift to 1.7% from 1.4% previously. But 45 minutes later in the press conference an upbeat Draghi boosted the Euro and pushed core global yields higher as he ever so slightly suggested the ECB door could be opening to the possibility of a change in policy stance in the future.

Draghi noted that further measures to support the Eurozone economy have become less likely given the threats to its recovery have become less severe and while he also noted that “There is no sign of a convincing upward trend in underlying inflation,”, he then added that “There is no longer that sense of urgency in taking further actions,” .

The Euro jumped about 60p to 106.15 on Draghi’s comments but the move quickly faded and now it trades about 20pips lower at 105.92. In contrast reaction in the bond market has been more lasting. 10y bunds have ended the day close to their overnight highs (up 5.6bps to 0.421%) and 10y UST yield have continued to creep up and briefly traded above 2.60%.

Meanwhile commodities and not just oil, have remained under pressure. 20 days ago iron ore was close to $95 now is at $86.8, oil was at $54.5 and now is at 48.96.and copper is also down almost 8% from its mid-February peak.

Unsurprisingly then commodity linked currencies are the G10 underperformers overnight. The AUD (-0.33%) traded below 0.75c last night before finding some support, CAD is also down 0.2% and NZD is -0.30%. The latter appears to be finding some support at 0.6890 and it has traded mostly sideways in the last few hours.

Finally, European equities ended the day mildly in positive territory and US equities looks set to end the day essentially unchanged.

Coming Up

February’s US employment report is today’s data highlight and is scheduled for release half an hour after midnight (Sydney time). In our time zone, however, the day starts with New Zealand’s card spending data (Feb) followed by Australia’s housing finance (Jan) and Japan’s PPI figures for February.

Ahead of the US payrolls report, Germany gets its January current account balance and the UK releases industrial, manufacturing and construction output data for January. All monthly readings are expected to print in negative territory. The pound has been under pressure in recent days and while monthly output data can be volatile, a round of soft data releases below expectations tonight could well be the trigger that pushes GBP below the 1.21 mark, a level not seen since mid-January this year

After yesterday’s stronger than expected ADP print (298k vs 200k exp.), the market is looking for a 200k non-farm payrolls outcome tonight but the ‘whisper number’ is probably closer to 250k. Meanwhile the consensus is looking for the unemployment rate to slide 0.1% to 4.7% and for average hourly earnings to rebound +0.3% in the month taking the annual reading to 2.7% from 2.5% previously.

Right now a Fed hike looks well baked, as Ray Attrill, our Head of FX Strategy, noted yesterday and we will probably need to see an extremely soft report tonight, particularly the earnings numbers, to stop the Fed from hiking next week.

A hike next week is 88% priced and a report with no surprises tonight could well push expectations close to 100%. But with forward job indicators suggesting solid non-farm payrolls numbers should be expected over the coming months, tonight’s earnings data will probably be more important given its likely influence on the Fed rates guidance next week ( the dot plots)) and market’s expectations of further rate hikes in 2017. Currently the market is pricing over a 60% chance of a third Fed hike by December.


Bond On global stock markets, the S&P 500 was +0.10%. Bond markets saw US 10-years +3.28bp to 2.59%. In commodities, Brent crude oil -1.21% to $52.47, gold-0.6% to $1,202, iron ore -0.5% to $86.79, steam coal -0.6% to $78.20, met.coal -0.8% to $161.50. AUD is at 0.7509 and the range since yesterday 5pm Sydney time is 0.7492 to 0.7534.

Good luck,

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