ECB Game Day

new ecb

  • The focus is of course on the ECB meeting, and specifically Draghi’s press conference 
  • Australia created 62k new full-time positions while losing 48k part-time positions 
  • As widely anticipated, the Bank of Japan stood pat and shaved its inflation forecasts 
  • Sterling moved higher in response to the stronger than expected rise in UK retail sales
  • Bank Indonesia expected to keep rates steady; Brazil mid-July IPCA inflation is expected to rise 2.87% y/y 

The dollar is broadly firmer against the majors ahead of the ECB decision. The euro and Swissie are outperforming, while sterling and Aussie are underperforming despite strong data reports. EM currencies are mostly weaker. CZK and PHP are outperforming, while TRY and MXN are underperforming. MSCI Asia Pacific was flat, with the Nikkei rising 0.6%. MSCI EM is down 0.1%, with the Shanghai Composite rising 0.4%. Euro Stoxx 600 is up 0.1% near midday, while S&P futures are pointing to a lower open. The 10-year US yield is flat at 2.27%. Commodity prices are narrowly mixed, with oil flat, copper up 0.1%, and gold down 0.3%.

The focus is of course on the ECB meeting, and specifically Draghi’s press conference. The ECB President is expected to continue preparing the market for what is likely to be an announcement at the September meeting, which will also feature new staff forecasts. The September meeting is seen as the likely venue for announcing an extension of asset purchases, albeit at a slower pace, into next year.

However, premature tightening of financial conditions is not warranted either. Draghi may lean against it by reiterating that the risks of deflation have ebbed primarily because of the extraordinary monetary stance. Prices have not yet entered a self-sustaining, durable path to the target. Draghi’s tone may be just as important as the content of his remarks today. Our reading of sentiment suggests a bias to buy euros on pullbacks.

The US dollar is enjoying a firmer tone against the major currencies today. Yesterday the euro was confined to narrow ranges inside the broad range set on Tuesday (~$1.1470-$1.1585). While the euro is a little softer today, it remains within Tuesday’s range still. It does not appear to be simply position adjustments ahead of the ECB meeting. There is a large (~830 mln euro) option struck at $1.15 and another (~750 mln euro) at $1.14 that expire in NY today.

Australia reported strong employment data. After making new highs near $0.8000, it has reversed to toy with yesterday’s low. A convincing break of that area (~$0.7910), especially on a closing basis, could be the kind of technical reversal that momentum traders take note.

Australia created 62k new full-time positions while losing 48k part-time positions. It is the fourth strong full-time job creation over the last five months. Consider that in H1, Australia created on average nearly 28k full-time jobs a month. Last year, the monthly average was a loss of nearly 2k full-time jobs. Hours worked rose 4.6% at an annualized rate in Q2.

The employment data bodes well for consumption, production, and exports. The central bank is likely to recognize the diminished downside risks while the substantial slack discourages a rate hike. Wage pressures are modest and next week’s Q2 CPI is expected to show steady or slower inflation.

As widely anticipated, the Bank of Japan stood pat and shaved its inflation forecasts. This fiscal year’s inflation forecast was cut to 1.1% from 1.4%. It pushed out for another year, now around FY19, when the 2.0% core inflation (excluding fresh food) is approached. This signals a BOJ that remains committed to its unorthodox stance. Despite coming under pressure from some in the Diet, the BOJ is not talking about exit or tapering.

The BOJ also tweaked its growth forecasts. The economy is expected to expand by 1.8% this fiscal year compared with 1.6%, while FY18 GDP is forecast at 1.4% up from 1.3%. FY19 GDP is expected to slow to 0.7% (unchanged forecast) as it includes the expected sales tax increase.

Separately, Japan reported that its trade balance swung back into surplus in June after a deficit in May. Exports rose 9.7% year-over-year while imports rose 15.5%. Both were stronger than expected, though the resulting trade surplus was a little smaller than forecast. Stronger foreign demand is helping spur domestic activity, especially machine orders, industrial production, and capex. Japan’s exports to China, its largest trading partner are up 19.5% year-over-year. Exports to the EU are up 9.6%, while exports to the US have risen 7.1%.

The dollar recorded a high of nearly JPY114.50 on July 11 and has trended lower. It reached nearly JPY111.55 yesterday and recovered today toward JPY112.40. There is initial potential toward JPY112.70-JPY112.80 to complete the retracement of the recent decline. There are nearly $1.3 bln of options struck between JPY111.45 and JPY112.00 that are set to expire in NY today.

Sterling moved higher in response to the stronger than expected rise in UK retail sales. However, as we saw with the Australian dollar, data surprises are not the key driver of the price action today. Sterling was unable to turn higher on the session. It had been trading at new lows for the week, near $1.2970 before the data and popped up to almost $1.3020 before hitting new offers. There are GBP360 mln options struck at $1.30 that expire today and another GBP225 mln at $1.2950, but potentially more significant is the nearly one billion euros struck at GBP0.8850 that will be cut today.

UK retail sales excluding auto fuel rose 0.9%, nearly twice the median forecast from the Bloomberg survey. This follows a revised 1.5% decline in May (from -1.6%). Last month was the hottest June in more than 30 years, and this spurred strong demand for summer clothing. The underlying concern that higher prices and slowing wage growth will sap the purchasing power of households has not been alleviated by today’s report. Next week, the UK reports the first estimate for Q2 GDP. After slowing to 0.2% in Q1 from 0.7% in Q4 16, many expect the UK economy to have grown 0.3% in Q2.

Oil prices are consolidating today after rallying 1.5% yesterday on the back of the EIA report showing that US inventories fell 4.7 mln barrels in the week ending July 14. This brings the three-week drop to 18.6 mln barrels, the largest such drop since September. It was a larger drop than expected and contrasts with the API estimate of a 1.6 mln barrel build. The inventories of the other fuel products also fell, and gasoline stocks are 5% lower than a year ago.

The US data today includes weekly jobless claims, the July Philly Fed survey, and leading economic indicators. Although there has been some increased speculation that the US is recession-bound, evidence is unlikely to be seen in today’s report. Weekly jobless claims have edged higher recently, with the four-week moving average rising to its highest level in three months, though 246k is still consistent with a robust labor market. Note that claims data is for the week that the survey for the national figures was conducted.

Leading economic indicators are also not suggesting anything like a recession. The LEI has averaged 0.4 this year and 0.2 last year. The June report is expected to match this year’s average. If an economic downturn were approaching, one would expect weekly initial jobless claims to rise sharply and for the LEI to turn down.

Bank Indonesia is expected to keep rates steady at 4.75%. CPI rose 4.4% y/y in June, above the 4% target but still in the 3-5% target range. While the bank signaled the end of the easing cycle after its last 25 bp cut in October, we think a tightening cycle is still some ways off. Fitch affirmed its BBB- rating with a positive outlook, noting that possible triggers for an upgrade include stronger external finances as well as strong and sustainable growth.

Brazil mid-July IPCA inflation is expected to rise 2.87% y/y vs. 3.52% in mid-June. If so, this is further below both the 4.5% target and the 3-6% target range. Next COPOM meeting is July 26, and markets are leaning towards another 100 bp cut to 9.25%.