Good morning and welcome back, I think it is safe to say that summer is now in the books. While the prior focus before the central bank soiree at Jackson Hole this weekend was Janet
Yellen’s less than dovish speech it was Mario Draghi, President of the European Central Bank that has stolen the limelight. Within his speech, Draghi laid the groundwork for additional policy action, further weakening the euro and increasing market bets that these falls will persist. He also hinted that his stance on government austerity was starting to soften as well as imploring governments to help.
The key sentence during Draghi’s speech was “The Governing Council will acknowledge these developments – fall in inflationary expectations – and within its mandate will use all the available instruments needed to ensure price stability over the medium term.” This was a drop-in; not in the original draft and does suggest that Draghi was tinkering up until the time he gave it. Whether this was to obfuscate the language from more hawkish members of the Governing Council – the Bundesbank for example – may never become clear but suggests that a fight on this is forthcoming.
The language overall points to a plan that combines the demand-side help of a quantitative easing plan with supply-side structural reforms. We just hope that we have finally come to a point where the European political and economic apparatus are seeing eye to eye on the need for a shift in policy. Previous efforts have been in direct response to near-term acute pain such as the 2011 sovereign debt crisis; today’s chronic issues were in danger of being dealt with a day late and a dollar short.
The impact on the euro has been to send it soundly lower. EURUSD is trading at the 1.32 level for the first time since September last year with EURJPY, EURGBP both lower too. We see no reason to amend our rate predictions from this announcement however and expect a gradual decline in the single currency to persist, especially should the latest inflation reading from the Eurozone, due at the end of the week, break a new cyclical low.
Indeed euro could continue lower should French President Francois Hollande appoint a pro-reform government following a cabinet reshuffle over the weekend. Yesterday’s German IFO number signalled a further deterioration in German businesses’ thoughts for the present and future of the German economy.
Geo-political issues may not have got too many headlines over the weekend but remain churning around in the background. Islamic State forces are said to have taken control of a Syrian air base yesterday with other members of the group still in fighting in Northern Iraq. Oil markets have remained higher as a result, with American rhetoric increasing around the prospects of further air strikes and/or ground troops.
Sterling has remained stable overnight despite some fears over First Minister Alex Salmond’s win in last night’s television debate on Scottish Independence. The vote is due three weeks on Thursday, and while the ‘No’ campaign remains in a commanding lead, a tightening of the polls in the lead-up to the ballet will just drag on GBP.
Today is all about US data and a push higher in durable goods orders in July is expected. We are also looking for a strong consumer confidence figure to help the greenback extend its recent run.
