HomeContributorsFundamental AnalysisPresident Lagarde Is Expected To Keep Its Monetary Policy Unchanged

President Lagarde Is Expected To Keep Its Monetary Policy Unchanged

Markets

Both European and US equities fell prey to the pandemic worries yesterday. Germany imposed a one-month closure on bars and restaurants. France announced a nationwide lockdown for one month. Pressure on US hospitals is also rising. Losses mounted up to about 3.5%. The technical picture in EuroStoxx50 deteriorated drastically after giving up key support at 3012. The S&P500 fell below support from the upward sloping trendline. Oil prices slumped more than 5%. Core bond yields dipped but staged an intraday comeback, limiting losses for Germany to 1 to 2 bps. The 10-yr yield bounced off key support near -0.64%. US yields even eked out tiny gains. The dollar strengthened but once again unconvincingly. EUR/USD losses could have been larger given equity market moves. The pair closed lower at 1.1746 (from 1.1796) but off intraday lows near 1.172. The trade-weighted DXY finished the session at the upper bound of the downward trend channel after a false intraday break-out on the topside. USD/JPY (104.32) stayed north of support at 104. Sterling whipsawed amid sour sentiment and constructive Brexit headlines. EUR/GBP closed slightly higher still at 0.904. Asia trades once again more resilient than Europe and the US this morning. Stocks gapped lower but pared most of the losses as the session evolves. The BoJ met (see below). The dollar loses marginally against most peers, the yen excluded. Core bonds trade with a slight downward bias.

US will show a sharp rebound in activity in the third quarter today (expected at 32% q/q annualized) after falling off a cliff in Q2 (-31.4% q/q ann.). We think there’s room for a slight positive surprise. However, with restrictive measures in the US looming to contain the escalation of the pandemic, the figure is more than ever outdated. Focus then turns to the ECB. President Lagarde is expected to keep its monetary policy unchanged. The Governing Council meets against the background of rising economic woes amid fresh semi-lockdown measures which further depress an already bleak inflation outlook, putting at risk the central bank’s prediction of a return to pre-COVID GDP levels by the end of 2022. External (market) pressure and a deteriorating outlook will probably force the ECB to act in December. We continue to deem it unlikely that the ECB will cut its deposit rate further even as the 3-month forward Euribor curve discounts a small cut in 2021. Cutting interest rates against euro strength is even less likely at the current exchange rate. Several ECB members stepped up verbal interventions around EUR/USD 1.20 earlier this year, but soon learnt that markets don’t buy the threat. The ECB’s other possibility centers around asset purchases. The second Covid-wave warrants an extension of PEPP beyond the currently eyed mid-2021. Simultaneously, the ECB could raise the amount of the envelope even if more than half of the targeted €1350bn still needs to be spend. The absence of any immediate policy action risks disappointing markets but we think the market reaction will stay rather limited. Much of the semi-lockdown news has been announced at this stage (cf. France, Germany etc.). In this respect, recent euro losses could have been larger. German yields bouncing off key support at -0.64% yesterday suggests no immediate break lower. If selling pressures on equity markets were to ease (cf. futures), we assume both EUR/USD and German (and US) yields to hold a cautious upward bias in a daily perspective.

News Headlines

The Bank of Japan left its policy unchanged. The policy rate remains at -0.1% while keeping the 10-y yield at around 0%. Measures to support the corporate sector and the economy remain in place. The bank downgraded growth for 2020 to -5.5% from -4.7%. However forecasts for FY 2021 and 2022 were upwardly revised to 3.6% and 1.6%. 2020 inflation was downwardly revised to -0.6% due to government sponsored discounts. The bank judges the economy will improve as a trend as the impact of the pandemic gradually subsides, though the pace will be moderate.

The Central Bank of Brazil yesterday left its Selic rate unchanged at record low 2%. The policy committee said inflation expectations remained significantly below target and kept the door open for a limited further easing. The Committee also assess the recent spike in inflation due to food, oil prices and weaker FX, to be temporary. It will closely monitor the evolution. The Bank assessment was softer than expected.

 

KBC Bank
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This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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