Amid slowing global growth and looming recession concerns, the ECB yesterday got in line behind the US Fed and Bank of England, in effectively freezing interest rates. Appearing more dovish-that-expected, the central bank announced that interest rates will be kept at current historical levels (0% core and -0.4% deposit) for the remainder of 2019. Eurozone growth forecasts were also dramatically sliced to 1.1%, from 1.7% for 2019. ECB President, Mario Draghi stated that Q4’18 growth within the region had fallen to 0.2%; half that achieved in the first two quarters of 2018. US-China trade wars and uncertainties over the Brexit outcome were highlighted as two key drags on eurozone growth.
Inflation forecasts were also revised lower, from 1.6% to 1.2% for 2019. The ECB announced a fresh round of cheap bank loans via a series of targeted long-term refinancing operations (TLTROs); commencing in September and running through to 2021. The euro took a massive plunge following the policy meeting, falling to a four-month low against the dollar and the yield on the benchmark 10-year Bund traded at its lowest level since 2016.
It is clear to us that a global slowdown remains a growing concern, especially amid uncertainty surrounding the US-China trade talks. Just this morning we had China’s weaker-than-expected trade releases for February; albeit once Lunar holiday seasonality is split out, the numbers do not look as bad that they initially appear. The difference here is that with interest rates at these depressed levels the ECB has nowhere to go if further easing is required, whereas China still has an array of firepower to deploy, including its stable USD 3.09tn fx reserves.
This afternoon's U.S. employment data was a rather mixed bag with just +20k jobs added in February, against expectations of +180k and the outside report of +304k in January. The unemployment rate fell to 3.8% from 4% previously and the all-important average hourly earnings reading picked up to 0.4% mom moving from 3.3% to 3.4% yoy. Strangely the participation rate was stable at 63.2%, which given the headline number we would have expected some movement.
The US Treasury market is rallying on the headline number with the 10-year up immediately around 20 cents in price, however, even as writing prices are trading back to levels before the release. Broadly, it does feel as though the market is looking for reasons to rally at the moment and does have a positive undertone. Yet to be proven, but the US dollar carry trade could be one of the reasons as the DXY broke through the technical target of 97.20 level last night on the back of the ECB statement.