The Forgotten Central Bank
Given the focuses on the Federal Reserve, People’s Bank of China and the Bank of England, today’s upcoming European Central Bank meeting nearly slipped through without too much fanfare. Stuck in the middle of an asset purchase plan and with the noises from Greece almost silent now, few changes are likely from the ECB.
If there are to be any changes today they will be in language around the Bank’s purchases of bonds. We noted yesterday that ECB member Praet’s comments about additional spending were hardly subtle and will likely be backed up by a lowering of inflation forecasts at the meeting today. We would have to expect that forecasts for both 2015 and 2016 will be taken lower but a positive reassessment of growth expectations are also likely.
Crude Oil remains the key
We have talked long and hard about the positive impact of lower oil prices and the gradual effect that it will have on consumer spending as time goes on. Europe does not produce much oil and therefore the marginal increase in disposable income and growth from lower energy prices is quite profound.
All in all we can expect a quiet meeting with the Bank unlikely to pre-commit to any policy changes that will not be put into place until this time next year. Language around monetary policy will emphasise how loose it is at the moment but there is unlikely to be too many hints at anything further. Our thoughts are that QE spending will have to be extended by the ECB however, today will not be the day that it is.
No help for the proud pound
Sterling is in a bit of a pickle at the moment having had a pretty bad August. The ‘Risk Off’ atmosphere that the Chinese market moves have caused have obviously damaged sterling from an interest rate expectation point of view and the UK’s own current account position – the level of our trade accounts with the rest of the world – has not helped. We are in deficit and you only have to look at the currencies benefiting from this period of market peril – the euro, Swiss franc and the Japanese yen – to see who is in surplus.
Aussie waiting on its Chinese big brother
AUD remains in the wars following a poor retail sales announcement overnight. Some are saying that the fall was ‘unexpected’ but given the growth dynamics and headwinds to the Aussie economy it is hardly surprising.
A few people asked yesterday why I think that we have seen a bottom in the Australian dollar. Firstly the market responses to the negative news from Australia have grown tired, a symptom of a market that is overstretched. Secondly, and most importantly, I think that there is another shoe to drop in the coming weeks from China. We have had the monetary policy loosening, now we must wait on the fiscal side of the coin. A long weekend like we have in China at the moment would provide the perfect back-drop.
The day ahead
Ahead of the ECB we have services PMIs from the UK and Europe with the US measure due at 3pm. The releases from the manufacturing sector were disappointing through August; we will look to see whether the pressures of deflation are hitting the services sector too.