Market movers today
Today’s key event will be the ECB meeting. With economic data remaining lacklustre, the case for additional stimulus has strengthened. In a first step, we expect the Governing Council today to adjust the forward guidance to signal the possibility of lower policy rates in the future. This should set the scene for a comprehensive easing package to be unveiled at the September meeting (see ECB Preview: Warming up for Draghi’s Grande Finale ). Markets continue to price in a c.40% probability of a 10bp cut at the July meeting and might hence be disappointed by the lack of action. However, we expect any sell-off to be short-lived as focus quickly reverts to the September meeting.
Earlier in the day, the German Ifo figures for July are due out and markets will monitor whether they bear the same dire message as yesterday’s PMIs (see more below). Both the PMI and ZEW surveys point to more weakness to come for Ifo expectations.
As the US reporting season continues, markets will keep an eye on June durable goods orders for signs of weakness in the capex cycle ahead of tomorrow’s Q2 GDP print. See our FOMC preview: Starting by cutting 25bp, published this morning.
Pedro Sanchez faces a second vote in parliament over his reappointment as PM. If he falls short of a simple majority, Spain is heading for its fourth election in as many years.
In Scandinavia, we have some data out for release, notably Norwegian unemployment data and Swedish manufacturing confidence for July.
In the emerging markets space, focus reverts to Turkey. The muted reaction of the TRY to Erdogan’s dismissal of central bank governor Cetinkaya and the U-turn by global central banks should allow the Turkish central bank to ease policy today without triggering a major sell-off in the TRY in our view.
Selected market news
10Y Bund yields fell back to -0.38% as July euro area PMIs confirmed a weak start into Q3 for the economy (see Euro Area Research: Catching up with reality ). The manufacturing downturn intensified as new orders slipped and firms scaled back on staffing. The ongoing strength of the service sector should keep the economy afloat in Q3, but PMIs bear out a message of continued subdued growth running only at 0.1-0.2% q/q. Although PMIs give ECB the perfect argument to come with a comprehensive easing package, we do not think the survey signals were dire enough to rush the Governing Council into a decision already today, not least because loan growth to the private sector remains dynamic as yesterday’s data also showed.
After US PMIs bore a similar message of a weakening global manufacturing cycle, sentiment got a welcome boost from reports that the Chinese government has approved purchases of up to 3m tonnes of US soybeans free of retaliatory import tariffs. Trade negotiations between the two countries are set to restart next week with senior US officials travelling to Shanghai, but a rocky road in the negotiations still lies ahead in our view.
