Markets
The ECB left its deposit rate (-0.4%) and the refinancing repo rate (0.0%) unchanged today, as expected. The bank further eased/prolonged its forward guidance. It will keep interest rates at current low levels at least through the first half of 2020. The bank also specified that it will provide long term financing in the new quarterly TLTRO’s at 10 basis points above the average rate over of the main Eurosystem refinancing rate over the life of the respective TLTRO. For banks with eligible net lending surpassing a benchmark, the rate can be reduced to as low as the average interest rate on the deposit facility plus 10 basis points. Conditions on the new TLTRO thus are slightly less favourable than on the previous series. The ECB also published new staff projections for growth and inflation over the policy horizon. The forecast for 2019 growth (1.2% from 1.1%) and inflation (1.3% from 1.2%) was slightly upwardly revised. 2020 growth (1.4%) and inflation (1.4%) were revised slightly lower. During the press conference, the ECB president acknowledged headwinds from the global context, but he also indicated that the ‘domestic’ economic context remains favourable. The ECB president saw no reason to expected a recession or deflation. Today’s decision was taken unanimously but some governors raised the issue of cutting the (deposit) rate or restarting QE. For now, this is not deemed necessary. With respect to the negative deposit rate, the ECB president said that the positive contribution of negative interest rates is not undermined by side effects.
German bonds gained slightly ahead of today’s ECB meeting. The German 10y yield slipped to a new all-time low of -0.24% before rebounding after the policy statement was published. The package of ECB decisions wasn’t considered as soft as expected, pushing the 10y yield to an intraday high of -0.19. Draghi mentioning that some officials raised the possibility of rate cuts or reviving the asset purchasing program deprived the upward move of its momentum however. Yet, the German yield curve still bear flattens with yield changes varying from 4 bps (5y) to 2 bps (10y). US yields entered calmer waters compared to a few days earlier lately. The yield curve bull flattens as the 2y yield remains unchanged while the 10y yield loses about 2 bps. On currency markets, EUR/USD showed a similar move as German yields. The couple spiked after the press release and during Draghi’s first minutes during the press conference but had to give in some of the gains later on. EUR/USD is currently struggling to hold above the 1.1265 resistance.
EUR/GBP trading was again mostly technical in nature and held to a tight sideways range in the mid 0.88 area. Calm in sterling trading was briefly disturbed on headlines from BoE’s Carney’s introduction to the BoE annual report as the BoE Governor maintained its assessment that the BoE will need to raise interest rates if the economy develops as expected. However, this wasn’t really new and any sterling gain was almost immediately reversed. Later in the session, EUR/GBP gained some ground in line with overall ECB driven rebound of then euro. EUR/GBP is currently trading in the 0.8870 area.
News Headlines
The US could slap China with another batch of tariffs on goods worth “at least” $300 bn, Trump told reporters today, adding however that he thinks China (and Mexico) very much want to make a deal. China reiterated it does not want a trade war but is not afraid of one.
The central bank in India cut rates from 6% to 5.75% and switched its monetary policy stance to accommodative, suggesting more rate cuts going forward. The central bank also downgraded growth forecasts for 2020 to 7% (from 7.2%) as the economy continues to suffer from a marked slowdown.
