Markets
The ECB kept its monetary policy and forward guidance on interest rates, reinvestments and asset purchases unchanged. The ECB anticipates APP to end by December 2019. The economic and inflationary assessment stayed unchanged even if ECB President Draghi admitted that incoming data were somewhat weaker than expected. Risks to the eco outlook are still broadly balanced, but protectionism, financial market volatility and emerging markets remain prominent. Draghi stressed that it’s totally about a weaker momentum and not a downturn. He referred to country specific factors (eg car sector in Germany), a return to normal from the exceptional growth/export performance last year while the trade conflict, Italy and brexit cause some uncertainty. He didn’t take a strong position on the weaker eco data and referred on several occasions to the new December GDP and inflation forecasts. They will point out whether or not the ECB becomes more cautious. The inflation chorus was unchanged. Core inflation is expected to pick-up towards the end of the year because of the ongoing economic expansion, the ECB’s monetary policy and wage inflation. Asked about the next steps for the ECB, Draghi said that two members raised the issue of TLTRO’s, which huge redemptions due by the end of 2019. The December meeting could also in this respect turn out to be very interesting. The ECB chair got a lot of question on the Italian-EU standoff, but he kept his cards close to his chest expressing hope that reason will conquer in the end. He declined to make what-if analyses for what might happen to Italian debt and how the central bank’s reaction function would then look like.
European equity markets decoupled from the sell-off yesterday in the US and in Asia this morning. The intraday swings in equities had only modest impact on core bond yields and on EUR/USD. The Bund contract lost a few ticks. EUR/USD settled in a tight range in the low 1.14 area. A soft German IFO release was also largely ignored. Investors looked forward to the US equity performance and to Draghi’s press conference after the ECB policy decision. At the ECB press conference, president Draghi confirmed the economic assessment from September. The ongoing mildly positive tone from the press conference caused a negligible rise in core European yields. EUR/USD temporary gained a few ticks, but soon reversed this gain. US eco data were mixed with also no clear guidance for markets. The risk rebound caused a modest rise in core US and European yields at the time of writing, US yields rise between 1.3 bps (30-y) and 3.5 (5yr). Changes on the European yield curve are negligible (<1 bps across the curve). Peripheral spreads are narrowing in line with an overall better risk sentiment with the Italian bond outperforming (10y spread narrowing 9 bps). Changes in the major FX cross rates remain modest for now. EUR/USD reversed minimal gains and trades again near recent lows (1.1385 area). USD/JPY returned to the 112.35 area. So, if anything, there are is a slight tendency toward USD strength as US equities are rebounding after yesterday’s sell-off.
News Headlines
The Norwegian central bank kept its policy rate as widely expected unchanged at 0.75%. Economic growth is slightly below forecasts while inflation is somewhat higher. Overall conditions remain broadly in line with the scenario plotted in September, setting the central bank on course for a second rate hike by early 2019. The Turkish central bank held its policy rate steady at 24%, following the impressive September hike (from 17.75%) and said that upside risks on pricing behavior continue to prevail.
German IFO business sentiment disappointed in October (102.8 from 103.7), like PMI’s did yesterday. Details showed both a deterioration in the current assessment and in the forward looking expectations component. US eco data printed mixed. Weekly jobless claims continue hovering near multi-decade lows (215k). US durable goods orders increased by 0.8% M/M in September (vs -1.5% M/M), but capital goods order nondefense ex aircraft, which is a proxy for investments in US GDP, unexpectedly declined, but the September number was upwardly revised.
