Again the euro took a hit touching 1.14 versus the dollar earlier today following: first yesterday’s unprecedented demands by the European Commission on the Italian government to revise their budget for 2019, followed by today’s weak PMI data across European majors – including 1 and 2 point shortfalls from forecasts for German manufacturing and services respectively.
It’s another one of those central bank days today, with the European Central Bank, Bank of England and not forgetting the TCMB (the Turkish Central Bank) announcing policy decisions this afternoon. Although the last decision to raise rates in the UK was unanimous, and subsequent relatively strong data has supported their decision, today the Bank unanimously decided to hold its policy rate at 0.75% (and may remain the case until after Brexit) signaling continued caution over the near-term uncertainties of leaving the EU.
The ECB left its policy rates, QE stance, and its forward guidance on rates unchanged at yesterday’s meeting in line with market observers’ expectations. President Draghi called the Trump-Juncker deal a “good sign” but still noted downside risks to the outlook from trade. He continued to call the outlook for growth as “broadly balanced” and noted some improvement in recent survey data.
This morning, the euro rose to a 10-day high along with sovereign yields across the EU as ECB Chief Economist, Peter Praet gave a rather typical presentation outlining the journey and challenges of “Monetary policy in a low interest rate environment” to the “Congress of Actuaries” in Berlin (I know, how did we forget to put this in the diary?). His formal remarks, as usual, were dry but a good synopsis of the factors and thinking that have guided the Central Bank’s current policy stance: highlighting the “innovative and bolder measures” particularly their “Asset Purchase Programme (APP) [which] has been the pivotal component of [their] strategy for countering and reversing the crisis.”
Klass Knot, the Dutch Central Bank President, has said in an interview over the weekend that the European Central Bank (ECB) should make it crystal clear how it will end its current bond buying programme that is due to expire in September this year. ‘The program has done what could realistically be expected of it’ he told a Dutch current affairs programme.
Any of our regular readers or longstanding investors will be familiar with our keen appreciation of the merits of Net Foreign Asset (NFA) analysis and our investment philosophy which prefers to divide the investable universe into creditors and debtors. The effects of a country’s NFA position on long term currency direction and creditworthiness was a central theme in the thesis of ours over two decades ago. We used it to identify the incoherent pricing of, for example, Greek debt in late 2009 when yields were at all-time lows of 1.34% while net foreign debts had deteriorated to exceed 100% of GDP (though the country was still A1 rated!).
‘Whatever it takes’ - Three words that may have saved the Eurozone… for at least 5 years.
‘All the leaders of the 27 countries of Europe… said that the only way out of this present crisis is to have more Europe, not less Europe. A Europe that is founded on four building blocks: a fiscal union, a financial union, an economic union and a political union… there is more progress than it has been acknowledged… [people] underestimate the amount of political capital that is being invested in the euro… we think the euro is irreversible… Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.’
Yesterday Mr Draghi, ECB president, was given a bit of a rough ride by lawmakers in Holland as they pushed and pushed for answers to questions regarding ECB monetary policy and the timing of a wind down in monetary stimulus. According to reports legislators did appear to upset him on a number of points. However he did keep his cool refusing to give anything away adding it was too soon to consider a wind down, despite a ‘firming, broad-based upswing in the economy’.
Yesterday the Bank of England (BoE) found itself unable buy enough long dated gilts as investors continue to cling on to developed government bonds of all varieties. Following the BoE’s decision to cut the UK base rate and expand its quantitative easing programme by £60bn it only managed to receive offers to purchase £1.12bn of gilts with maturities over 15 years versus their target of £1.17bn. At least part of the reason for this shortage of availability is the more illiquid markets over the summ er – indeed the ECB overbought in earlier months in expectation of such illiquidity but the recent post Brexit expansion of QE obviously had no such option. This prevailing shortage, versus demand, of government bonds looks likely to remain a prolonged dilemma for central banks and investors alike.
In what could be the most market disruptive intervention to date, today the European Central Bank (ECB) begins their Corporate Sector Purchase Programme (CSPP); meanwhile German 10-year bund yields touched new record lows of 0.034% (though have “nearly doubled” since) and around 15% of euro corporate investment grade debt is already in negative yield territory. The ECB first announced it would include corporate sector purchases to the Asset Purchase Programme (APP) on March 10 and details of the CSPP were released at the end of April, but markets have yet to find consensus as to how large and how effective this extreme measure will be in pushing inflation closer to the target of “below but close to 2%”.
As we start the new week markets have been relatively quiet, which is somewhat expected given the big moves witnessed post the ECB meeting last Thursday. At that meeting the ECB announced it was cutting the main refinancing rate to zero, further reducing the deposit rate to minus 0.4% as well as expanding QE to EUR80bn a month. At the press conference after the announcement Mario Draghi, the ECB Head said “Rates will stay low, very low, for a long period of time and well past the horizon of our purchases”. When grilled about how low rates could actually go he said “From today’s perspective and taking into account the support of our measures to growth and inflation, we don’t anticipate that it will be necessary to reduce rates further. Of course, new facts can change the situation and the outlook.” Along with the ECB actions last week, tomorrow we have the Bank of Japan (BoJ) Monetary Policy Statement, where the market anticipates no changes to the policy rate after the committee’s decision to move into negative rate territory at the last meeting. Haruhiko Kuroda, the BoJ Governor’s press statement may make for interesting reading.
Gamers all around the world will be celebrating Nintendo's “Mario Day” today, with it being Mar10, meanwhile, markets have been focused on a different “Super Mario”, as what was expected to be the most challenging ECB meeting took place this morning.
A year ago yesterday, the ECB launched QE and has since spent EUR 700bn (or EUR 60bn per month) on bond purchases and has cut rates to boost inflation. Unfortunately neither policy has been effective enough; inflation actually slipped back into negative territory in February, on an annualised basis. Today the central bank announced: a cut to its benchmark interest rate to zero from 0.05% (a marginal ‘tax’ reduction for banks), the expansion of QE to EUR 80bn a month (more than the EUR10-15bn expected by the market), and a further slice to its deposit rate by 10bps to -0.4%, effective next week. Leading up to the meeting the futures market had already priced in a 100% probability of a rate cut. At Draghi’s press conference, he stated that although he does not anticipate further cuts “new facts could change this situation”.
The European Central Bank’s (ECB) Mario Draghi set a dovish tone yesterday when he addressed European lawmakers. In his opening remarks he confirmed the ECB “will not hesitate to act” if there were downward risks to price stability from low commodity prices and/or transmission issues. In the Q&A session, Draghi also reinforced his view that current policies are effective and are working. There was the usual line that the ECB still has plenty of instruments and the asset purchase programme (APP), or QE as its more commonly known, and is flexible enough to be adjusted to changes in the European economy and markets. He added that the ECB also have other instruments aside from APP, which may be a reference to a lower deposit rate.
Relative calm was evident today as US markets are closed for Presidents’ Day and China returns to work after the week long Lunar holiday. Our markets closed upbeat on Friday, spurred by a tidy $3 per barrel bounce in Brent (around +12% from the lows) combined with a positive day for stock markets in Europe and America. We thus start this week with a risk-on attitude with prices moving higher across the board.
Mario Draghi recently stated the “downside risks have increased again” and “in this environment, euro area inflation dynamics also continue to be weaker than expected. It will therefore be necessary to review and possibly reconsider our monetary policy stance at our next meeting in early March, when the new staff macroeconomic projections become available.”
The Bank of Japan (BoJ) has released a summary of opinions expressed by the 9 board members at the 28th - 29th January policy meeting. At the January meeting the BoJ took the market by surprise as they cut a key interest rate to below zero, in what some see as a bold move in its continued efforts to overcome deflation. The interest rate on excess reserves was taken down to -0.1%. Of the 42 economists surveyed by Bloomberg, only 6 predicted the move. Interest rates have not been above 0.5% this century, a long way from the 8% seen in the 1980’s. As expected the BoJ left QE at a rate of JPY 80bn a year.
Following on from the excitement over the ECB yesterday and disappointment from the limited rate cut, of 10 basis points, combined with the extension of QE for a further six months, the market was primed for today’s Non-Farm Payrolls (NFP) for November. The general feeling here is that the limited action by the ECB should assist the Fed with a rate rise at their December 16th meeting.
An interesting report yesterday from Bank of America Corp looks into who has been the big beneficiary from the easing of interest rates over the last several years and the Quantitative Easing (QE) put in place by central banks. The report says that there have been 606 interest rate cuts globally since the collapse of Lehman Brothers Holdings Inc. and over USD 12.4tn of asset purchases since the rescue of Bear Stearns Cos.
After a tumultuous three months across asset markets, we head into the final quarter of 2015 where market focus will remain on: the fragile global economy, the repercussions of more recent micro blowouts (read VW and Glencore) and the Fed’s rate decision.
Throughout the week there has been a lot of Fed-speak; with little change in Fed Fund guidance since the last FOMC minutes. There still appears to be a slight split in the Fed camp over this long-anticipated decision. Chicago Fed President, Charles Evans said in a speech on Monday that the US inflation and dollar headwinds may not subside until the middle of next year and has therefore called for the initial rate hike to be delayed; thus allowing the Fed to navigate through these headwinds. Other Fed members have been quick to state that short term interest rates will likely be raised before the end of the year. The market however appears to be ignoring this more hawkish Fed sentiment; Fed fund futures are pricing in the likelihood of a rate rise in December at 42.9% (up from 41.2% yesterday), with a probability of a move in October at only 16%, and 63.8% in March 2016. One of the main concerns is inflation, Fed Chair Janet Yellen voiced that the data dependent FOMC would like to see further evidence of the labour market improving and inflation moving closer to the 2% target; the latest PCE price index reading (the Fed’s prefered measure of inflation) was well below, at only 0.3% year-on-year in August. Whatever it may be, Fed members’ verbal guidance remains cautious so as to not cause any uncertainty in already knee-jerky markets.