A further slowing in growth
To borrow from Depeche Mode, it seems markets Just Can’t Get Enough with a dovish ECB taper and increasing confidence in US tax reform seeing a rally in risk assets.
European equities soared (Eurostoxx +1.3%), the Euro fell sharply (-1.2%), while US dollar strength continued alongside a grind higher in US yields (10yr +2.7bps).
First to the ECB meeting. The announced tapering of the Asset Purchase Program (APP) was largely as expected: asset purchases have been cut to €30bn a month from €60bn a month starting January 2018, with the purchases to continue until the end of September 2018, or beyond, if necessary. The ECB also said it would keep rates “at their present levels for an extended period of time, and well past the horizon of the net asset purchases”. Finally on reinvestment, the ECB said it would reinvest principal payments from maturing securities for an extended period of time after the end of the APP.
In response the Euro initially fell 0.6%, and then continued to fall against US dollar strength to end the day down 1.2% to 1.1652. Bund yields also fell sharply with yields down 6.7bps on the day to 0.42%. Why the dovish response by markets even though the announcement was as expected? The continued open- endedness of the APP likely contributed, as well as ongoing uncertainty the ECB has over inflation. Draghi noted “annual rates of headline inflation are likely to temporarily decline towards the turn of the year, mainly reflecting base effects in energy prices”. And that measures of underlying inflation “have yet to show more convincing signs of a sustained upward trend”.
On the other side of the Atlantic, US dollar strength continued with the DXY up 1.1% and now at 94.644 – the highest it has been since mid-July. While in part due to Euro weakness, the US dollar was supported following the passing of the 2018 Federal Budget by Congress (already having been approved by the Senate).
That importantly paves the way for tax reform being passed by a simple majority in the Senate. Republicans were quick to capitalise on the opportunity and stated that a more detailed tax plan is set to be unveiled to the House on Wednesday with drafting for the bill scheduled the week of November 6. Nevertheless, tax reform will be hard fought amongst Republicans with the Budget only passing with a narrow vote despite Republicans holding a sizeable majority in the House (it passed 216 to 212; Republicans hold 239 seats).
US yields also ground higher on the news with 10-year Treasuries up 2.7bps to 2.46%. Also supportive was a Politico article that said Taylor or Powell would be the next US Fed chair – they are both seen as more hawkish than Yellen, while Taylor is seen as more hawkish than Powell. US data was mostly second-tier with Jobless Claims still low, while inventories present slight downside risks to US GDP tonight.
The Aussie was hit overnight following a speech by Deputy Governor Debelle. He noted CPI was historically overstated by an average of 0.25% a year due to substitution bias – this bias will likely end with yearly reweighting, and that “there still remains a sizable degree of spare capacity in the labour market”. Importantly though, Dr Debelle still assesses the NAIRU at 5% – unemployment is currently 5.5%. The AUD initially dipped 0.3% and then fell further alongside USD strength to end down 0.6% to 0.7660. Watch for further downside if Australia’s High Court rules Barnaby Joyce is ineligible to sit in Parliament (see coming up for details).
The High Court will be under focus today for its ruling on the dual-citizenship crisis (2.15pm AEDT). The main decision to watch out for is Barnaby Joyce (lower house MP and Deputy PM) as the government currently only holds a one seat majority in Parliament. There are also six others, but these are senators who do not affect the ability of the government to govern.
If Mr Joyce is found ineligible, the government will likely need support from the lower house cross bench in between the ruling and the by-election that would result for Mr Joyce’s seat of New England (Mr Joyce is expected to re-contest his seat at any by-election). That support would likely come in exchange for some concessions to conservative independents – either Katter or McGowan. An alternative is for the opposition to voluntarily pair Mr Joyce’s no longer valid vote.
The last Federal by-election was for North Sydney in 2015 where a by-election was held within 7 weeks of a member resigning. That suggests any potential uncertainty could be resolved within 7 weeks of today’s ruling and Newspapers report the government is prepared for a December 2 by-election in the event. It is also worth noting that the lower house is not sitting today and is not scheduled to sit again until 27 November. Support by independents would then only be needed for two weeks, with Parliament then set to rise on 7 December for the Christmas break. (for more information please see a like to our AMW from August)
Internationally, focus will be on the Japanese CPI (10.30am AEDT) and US GDP (11.30 pm AEDT). Also out today is Chinese Industrial Profits and a final measure of the US Uni Michigan Consumer Sentiment survey.
As for Japanese CPI, the market looks for a similar pace of price growth in September for Headline (0.7% y/y) and Core (0.2% y/y). The Tokyo measure for October will also garner some attention where a softish print is expected at 0.1% y/y for Headline.
US GDP Growth is expected to be 2.6%, down from the 3.1% pace last quarter due to hurricane impacts. The Atlanta Fed’s GDPNow is similar and is expecting a 2.5% outcome. While an important release, hurricane damage will probably see analysts and more importantly the US Fed downplay any potential miss (similar to non-farm payrolls). Company reporting season also continues with UBS, Volkswagen and Exxon due.
On global stock markets, the S&P 500 was +0.13%. Bond markets saw US 10-years +2.73bp to 2.46%. In commodities, Brent crude oil +1.64% to $59.4, gold-0.7% to $1,266, iron ore -1.2% to $61.47, steam coal -0.1% to $97.10, met. coal +0.0% to $181.50. AUD is at 0.766 and the range since yesterday 5pm Sydney time is 0.7656 to 0.7719.
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