This morning the RBNZ cut its policy rate by 25bps to 2.25% and it signal that further easing may be required. Ahead of the announcement the market was pricing less than a 30% chance for a cut. Reaction to the announcement has seen the NZD/USD drop nearly 1.5% to 0.6665.  The statement notes that further easing many be required “to ensure that future average inflation settles near the middle of the target range “.RBNZ staff suggest they might like to wait until June but, realistically, a strong chance of an April cut should be priced for the meantime

Looking at the overnight session, global equities edged a little higher overnight buoyed by a modest rebound in oil prices. The lack of safe haven demand saw core global yields move back to the top of recent ranges and in currencies commodity linked currencies where the outperformers against the USD.

On the seventh anniversary of the US equity bull market, energy stocks led the gains on both side of the Atlantic retracing some of the lost ground from the previous night. The Euro stoxx index closed +0.47%, the FTSE100 climbed +0.37% and in the US the DJ is currently +0.1% while the S&P and NASDAQ are +0.25% and +0.28% respectively.

We would suggest that the tepid equity gains overnight are also reflective of a cautious market ahead of the ECB policy announcement tonight (see details below). Consistent with this view, the Euro price action overnight was quite telling. As equity markets edged higher the Euro weakened against the USD, however as the equity rally faded later in the session, the Euro quickly retraced most of its losses. In theory further stimulus from the ECB should be risk positive and should weaken the Euro, however given question marks over the effectiveness of unorthodox policy measures, uncertainty is pretty high. Tonight the devil will be in the details.

Looking at the currency leader board, the USD has underperformed against all G10 currencies, excluding the Yen. The CAD is the G10 outperformers boosted by a less dovish BoC. As expected the BoC left is policy rate unchanged, however the bank was more upbeat on the economic outlook while also noting that risks to inflation are roughly balanced. The AUD has continued its upward trend against the USD, despite the fact that iron ore prices dropped 8.8% overnight. The Aussie gained nearly 1% and it is now trading just under 0.75c.

In terms of data releases, UK manufacturing was better than expected (+0.7% m/m(vs +0.2% consensus), but industrial production printed at +0.3% vs the +0.4% consensus. US inventories rose 0.3% in January versus -0.2% expected

Coming Up

We have a light domestic calendar today with consumer inflation expectations the only data scheduled for release.

At 12:30pm China will release its consumer and producer inflation reading. Market consensus is for CPI to print at 1.8%yoy, in line with its previous reading in January. However, some commentators have suggested that the risk is for a stronger print, given the sturdy rise in food prices last month. As for the PPI number expectations are for another soft print. Consensus forecast is for PPI to come in at 4.9% yoy in February following the -5.3% print in January.

China could also release its aggregate financing figures for February. This data is scheduled for release sometime between today and next Tuesday. Consensus forecast is for 1.79 trn yuan in new finance, down from 3.42 trn in January. The strong new finance figures in January suggest some lending was brought forward ahead of the new lunar New Year holiday. Thus the smaller expected February number reflects a bit of payback from January.

Once we get over the China data release(s), attention will turn to the ECB meeting tonight. Following the strong easing signal from their January meeting, the question now is how hard is the ECB going to go rather than whether they will ease or not.

Bloomberg’s poll of 38 strategists/economists is showing the median estimate is for a 10bps cut to the deposit rate from   -0.30% to -0.40%. However, what the poll doesn’t show is that many expect the introduction of a tier system with a different rate on excess reserves. Like in Japan, the idea of the tier system would be to alleviate some of the pressures from this easing policy on commercial banks profitability.

The Bloomberg survey also shows that of those polled, 73% expect the ECB to increase the monthly pace of quantitative easing with the median estimate suggesting an uptick of €15bn. As for the details, speculation remains on whether the pool of eligible assets will be expanded and whether there would be any changes to the buying rules.

Note that the announcement will also include a new set of forecasts which will also have figures for 2018 for the first time. This new set of data will be valuable for the assessment on how quickly the ECB expects to meet its inflation target

Overnight

On global stock markets, the S&P 500 was +0.30%. Bond markets saw US 10-years +5.96bp to 1.89%. On commodity markets, Brent crude oil +2.95% to $40.82, gold-0.7% to $1,254, iron ore -8.8% to $58.02. AUD is at 0.7483 and the range was 0.7412 to 0.7528

Good luck,

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• Markets Today: 10 March 2016 (PDF,1MB)

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