May 6, 2020

Markets Today: Germany’s judges challenge ECB

The Euro and Italian bonds took a hit with German judges challenging the ECB on its QE activity.

Today’s podcast

Overview: 99 Luftballons

  • Risk sentiment boosted by containment rollback – S&P500 initially +2.0%, pared to +0.9%
  • Global growth proxies lift (AUD +0.4%; NZD +0.3%) along with oil (WTI June +20.4%)
  • High-frequency data suggests the low point in activity has now likely passed; now to the recovery
  • German court’s ECB ruling weighs on EUR (-0.5%); three months to justify bond buying program
  • Checking sentiment towards the close were sobering words by the Fed’s Clarida
  • Coming up today: NZ Unemployment, AU Retail US ADP Payrolls



“Back at base bugs in the software; Flash the message “something’s out there!”; Floating in the summer sky; Ninety-nine red balloons go by”, Nena 1983


Risk sentiment continues to be buoyed on news of more countries/states rolling back containment measures (latest being California and Hong Kong), followed by reports of more companies re-opening operations (Starbucks said 85% of its stores will re-open by end of the week). That’s giving hope that rollback will allow economic activity to resume and that we may be passed the trough in economic activity.

Equities rose with the S&P500 up +0.9% along with G10 FX global growth proxies of AUD +0.3% and NZD +0.5%. Despite the positive sentiment the USD also rose (DXY +0.3%) as the EUR fell -0.5% following the German Constitutional Court’s ruling that the ECB must undertake a “proportionality assessment” of its government bond buying program within 3 months and threatened to block the Bundesbank’s participation if it did not.

At this stage it is likely the ECB will be able to justify its program, but the key outcome is the ECB’s “whatever it takes” now comes with limits. It’s no surprise than to see only a limited impact of the court’s ruling on markets, the exception being Italian 10yr yields up +10bps. Other global yields were little moved with US 10yr yields +2.8bps to 0.66%. Commodities also lifted with WTI June +22% and up for the fifth consecutive day; Brent +15%.

The German court’s ruling in detail

The court ruled 7 v 1 that the German authorities acted unconstitutionally by not challenging the ECB’s bond buying program (they had “a duty to take active steps against” QE “in its current form”) and the ECB needs to carry out a “proportionality assessment” of its public sector purchase program to ensure their “economic and fiscal policy effects” did not outweigh its policy objectives, and threatened to block new bond-buying unless the ECB did so within three months. The Bundesbank’s Weidmann noted the decision emphasises the important design features of the public sector purchase program that, overall, ensure there is a sufficient distance from monetary financing. Given the Bundesbank’s support, it is likely the ECB will be able to justify its bond buying program to German authorities.

The ruling though does set the scene for a legal challenge against the ECB’s new €750b pandemic emergency purchase programme, which has looser limits than the previous public sector asset purchase program. It overall also suggests governments need to step in and take pressure off the ECB. There was only a limited impact on markets, but the ruling does provide a limit to the ECB’s “whatever it takes” pledge. EUR is now down 0.5% for the day at 1.0841. Italy’s 10 year rate rose by 10bps to 1.86% against a 2bps fall in the Germany 10-year rate to minus 0.58%.

US data largely came and went with little market reaction

The Non-manufacturing ISM was a little better than expected, but was much weaker below the surface. The Headline was 41.8 v 38e and 52.5p; the headline though was flattered by supplier deliveries which rose to 78.3 with supply chains tightening as firms closed. The more important Business Activity Index was just 26, New Orders 32.9 and Employment  30 – all deep into the contraction territory and more consistent with the Markit Services PMI of 26.7. Also out was the March Trade Balance, again largely expected (-44.4bn v -44.2e).

Yesterday’s RBA meeting also came and went without much fanfare with the cash rate and 3yr yield target held at 0.25%. The AUD was little moved on the news, having already lifted on positive risk sentiment. The only change was the RBA broadening its repo-acceptable collateral to include investment grade corporate bonds to assist with the smooth functioning of markets. The inclusion of investment grade corporate bonds potentially provides a liquidity boost for what had mostly been largely illiquid assets and provides a liquidity outlet for funds who may also be facing redemptions; some material tightening in corporate spreads is thus likely. The RBA also provided some information on its central forecast scenario which will be published on Friday.

The RBA sees unemployment peaking at around 10% and will still be above 7% by the end of next year.

Other data publishes also painted a sobering picture of the economy with weekly payrolls data showing that 7.5% of Australian jobs have been lost in the five weeks since the lockdown began, equivalent to about 1 million people losing employment. The PM also noted that more than 1 million JobSeeker claims had been processed and 4.7 million were receiving JobKeeper – that overall suggests 50% of the labour force is now being assisted by the government.

Coming up

Most focus this morning will be on Australian Retail Sales and NZ Unemployment. Unlike in prior releases, Australian Retail Sale is unlikely to be as market moving given the ABS now publish a flash measure – the flash rose 8.0% m/m in March and that is where the consensus is. Also out today is the quarterly volumes measure which feeds into GDP.

  • NZ: Unemployment/Employment (10.45am local, 8.45am AEST): Q1 unemployment data likely pre-dates most of the impact from COVID-19 lockdowns. Nevertheless, labour market conditions are likely to have weakened and the consensus expects a four-tenths rise in unemployment to  to 4.4% from 4.0%, while employment is expected to decline -0.2% q/q.
  • AU: Retail Sales-Mar (11.30am AEST): Unlikely to be market moving as before given the ABS now publish a flash measure of retail sales which rose 8.2% m/m in March and that is broadly where the consensus is. Also released is the quarterly volume measure of retail where consensus looks for a 1.8% q/q rise.
  • GE: German Factory Orders (8.00am local, 5.55pm):
  • EZ: Retail Sales-Mar & Final PMIs (10.00am local, 6.00pm AEST): Retail Sales are expected to fall a sharp -10.9% m/m.
  • US: ADP Payrolls (8.15am local, 10.15pm AEST): Likely to be closely watched ahead of the official measure of Payrolls on Friday. Consensus looks for -20.5 million payrolls to have been lost in April.

 Market prices

For further FX, Interest rate and Commodities information visit