Markets

This morning, European markets mostly traded in wait-and-see modus, counting down to the ECB policy decision/press conference. Equities apparently found a new short-term equilibrium after some sharp swings end last week and early this week. Bonds showed now clear trend. The euro kept some by default up-side bias as investors were keen to hear Largarde’s assessment on recent ascent of the euro (EUR/USD).

The ECB as expected left its policy rates unchanged. The ECB reiterated guidance to keep rates at present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2%. The ECB also continues its asset purchases as previously announced. The ECB president clarified that the full PEPP envelope will likely be used. In its the economic assessment, the ECB sounded rather optimist on the pace of the economic recovery. In its economic forecasts the ECB upwardly revised the 2020 growth from -8.7% to -8.0%. Changes to expected growth for 2021 (5.0% from 5.2%) and 2020 (3.2% from 3.3%) were less significant. Forecasts for inflation were little changed at 0.3% for 2020; at 1.0% (from 0.8%) in 2021 and 1.3% in 2022. Regarding, the euro exchange rate, the ECB explicitly said that it carefully assess the impact of the exchange rate on inflation.

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From the start of Lagarde’s press conference, the euro trended higher. The move was supported by headlines on a financial newswire indicating that the ECB didn’t intend to overact to the euro gains. The rather positive assessment on the economy, the unchanged inflation outlook despite recent decline in price data and ECB’s Lagarde on a question repeating the standard answer that the bank doesn’t target the exchange rate, only added to the by default euro strength. Despite the bank mentioning the exchange rate, recent euro rise doesn’t change the bank’s assessment in a profound way and the ECB has probably few tools to address current euro strength. EUR/USD jumped to the 1.19 barrier. At the time of the start of the press conference, the US jobless claims were reported weaker than expected. They maybe were a slight USD negative too. The trade-weighted dollar (DXY) dropped again below the 93 barrier, but evidently, this move was also mainly euro inspired.
Changes in the core US and European yields curves are modest. US yields changes very between -0.2 bp (5-y) and +2.0 bp (30-y). Bunds slightly underperform with German yields rising between 1.3 bp and 2.5 bp (10-y). Equites show a positive intraday bias. European equites reversed an earlier dip and show small gains. US equities are rebounding further showing gains of up to 1.0% (Nasdaq).

Interesting development also occurred in the EUR/GBP cross rate. Euro strength combined with cable softness propelled the pair to test the key 0.9175/84 resistance. Today, EU negotiator Barnier is meeting his UK colleague Frost. For now, there is little indication on any improvement on the recent political tensions. An EUR/GBP break beyond the 0.9185 area, would further deteriorate the picture for sterling.

News Headlines

French Labour Minister Borne confirmed today at BFM television that the government will continue paying up to 84% of salaries for employees in companies hurt by the COVID-19 crisis until next summer. The extension comes shortly after French PM Castex announced his €100bn “France Relance” plan.

Headline US jobless claims stabilized at 884k with continuing claims slightly rising from 13254k to 13385k. Non-seasonally adjusted pandemic unemployment assistance increased from 748k to 839k. US July producer price inflation rose by 0.3% m/m, but is down 0.2% on a yearly basis. Core PPI, excluding volatile food and energy components, rose by 0.4% m/m and 0.6% y/y.

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