Market had two main topics to keep in focus today. First, would markets continue to build on yesterday’s easing of growth fears that dominated trading up until Tuesday? Second topic would be the ECB policy meeting as it pre-announced to update its forward guidance in line with recent review of its policy framework. With respect to global market conditions, the risk-off repositioning continued to ease further. European equities indices are rebounding between 0.5% and 1.0%, suggesting a more constructive market assessment on the growth prospect compared to early this week. However, developments on core (US and German) bond markets still suggest underlying fragility. In this respect, US jobless claims printing at a higher than expected 419k from 368k last week illustrated an ongoing noise on the path of the recovery (including its consequences for the labour market). After a rebound late on Tuesday and yesterday, US yields still show hesitancy declining between 0.6 bp (2-y) and 2 bp (30-y). In this respect, US 10-y yield remains below the 1.30% reference. Cyclical commodities including oil and copper are holding on to yesterday’s rebound or even slightly gaining further.
With respect to the ECB policy meeting, the ECB as announced adapted the forward guidance in order to underline its commitment to maintain a persistently accommodative monetary policy stance to meet its newly formulated inflation target. The new ‘global’ forward guidance now reads: ‘In support of its symmetric two per cent inflation target and in line with its monetary policy strategy, the Governing Council expects the key ECB interest rates to remain at their present or lower levels until it sees a) inflation reaching two per cent well ahead of the end of its projection horizon and b) durably for the rest of the projection horizon, and c) it judges that realized progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at two per cent over the medium term. This may also imply a transitory period in which inflation is moderately above target’. At the same Lagarde basically maintained the economic assessment of the June meeting, with risk to the outlook seen as broadly balanced. The economy still needs broadly favourable financing conditions. In this respect, the Bank didn’t change its ‘cyclical’ guidance confirming PEPP asset purchases in current quarter at a significantly higher pace compared to Q1 and on the € 20bln monthly APP purchases. Detailed guidance on the sequence of PEPP and APP asset purchases apparently wasn’t discussed. That might happen when the ECB has new economic forecasts in September. European yields dropped temporarily after the publication of the statement but German yields currently are trading less than 1 bp different from yesterday’s close.
The calm somewhat reduced the dollars’ safe haven appeal. The trade-weighted index DXY declines from the 92.80 area to trade near 92.60. EUR/USD regained the 1.18 barrier with the rebound slightly accelerating toward the end of the ECB press conference. The recalibration of forward guidance apparently didn’t contain a ‘soft surprise’ for FX markets. At the same time, the technical picture hasn’t changed. For an improvement a rebound above 1.1880/95 area is needed. Sterling initially continued its risk-on rebound with EUR/GBP nearing the 0.8550 area intraday. CBI order data were solid. However, BoE’s Broadbent, in a speech joined the doves, indicating it might be right to overlook current (assumed temporary) rise in inflation. EUR/GBP currently again trades in the 0.858 area.
The Indonesian central bank left its key policy rate unchanged at 3.5% and cut growth prospects as the country grapples with the worst wave of the coronavirus so far. “For 2021, all BI [Bank Indonesia] policies are pro-growth to encourage growth”, the governor said during a briefing. The central bank now sees the economy growing 3.5%-4.3% this year vs. 4.1%-5.1% earlier after the government imposed stricter rules to contain the pandemic. Inflation was left unchanged at 2%-4% for 2021, partially the result of the weakening of the Indonesian rupiah. USD/IDR is currently trading stable around 14883 but has lost more than 4% since the start of the year.