I was told once that “love is not an expectations game”. Relationships between people can fall apart when the expectations of one party miss that of the other. Of course, some would say that this vindicates a pessimistic outlook on life; if you have no expectations of anything how can they be disappointed? Not a particularly cheery thought on a cold Wednesday morning, but something that the European Central Bank seems to be playing on at the moment.
Such is the froth in markets around the European Central Bank riding to the rescue of the Eurozone that the expectation of such is the main market force out there at the moment. Whether that is disappointed will become clear as we move into the next year. EURUSD, and the wider single currency, has come lower through the European session following headlines around another potential stimulus plan from the European Central Bank.
According to the Reuters news agency, the European Central Bank’s Governing Council could discuss purchasing corporate debt as soon as December. This would open up a potential EUR 1.4trn of assets for ECB purchase, although the bank is unlikely to target anything that isn’t very strongly investment grade.
The announcement seems a strange one in my eyes. Some believe this is a leak from backers of tighter monetary policy to shift focus away from QE while others think that this could see the SME financing that the Eurozone needs. Later in the session, a report from the Financial Times also quoting “two people familiar with the matter”, said that these purchases had been considered in the past but were not on the agenda for December.
This slowed the single currency’s decline briefly before markets decided to take the initial rumour out for another run. This morning, Luc Coene, the Governor of the National Bank of Belgium, has told markets that the ECB has ‘no concrete plans’ to buy corporate debt. As the political saying goes, “never believe anything until it has been officially denied.
Communications from central banks are the main movers today with news from the Bank of England and Bank of Canada. Today’s Bank of England minutes have been rather hamstrung by last week’s inflation announcement. The Bank will not have known of the number when making its policy decision and salient points around the economic outlook. That being said, it will be interesting to see whether the low inflation atmosphere, or fears thereof, is viewed as a help or hindrance for the UK economy. Despite the fact that real wage settlements are still negative, the recent deflation in energy and food prices has increased the real purchasing power of UK shoppers.
This will be something that we primarily look for in tomorrow’s retail sales figures but a decision around it being supportive would be seen as GBP positive, as it hints at an MPC ready to put aside its price control mandate in favour of a tightening of monetary policy. We will also be looking for signs that the recent slump in global growth, particularly from the Eurozone and China, has affected MPC members’ thoughts on the wider macroeconomic picture and where the UK fits into that. The minutes are due at 09.30.
The Bank of Canada meeting is expected to see rates held at 1% again. The Canadian dollar has had a torrid month or so in the face of a weakening oil price and a rampant USD and the Bank of Canada will do nothing to jeopardise this development. Governor Poloz and the rest of the Bank of Canada have wanted this for months and any language around the decision should support a weaker loonie.
US CPI at 13.30 has the ability to further weaken the USD away from the highs that it has made in the past fortnight on the back of a fearful market. Inflation has disappointed in nearly every developed market – overnight Australia’s slipped to 0.4% from 0.5% from the previous three months – and we see no reason why the recent strength of the USD and the decline in food and energy prices has not had a similar effect in the US. Markets are looking for a fall from 1.7% to 1.6% in the past year and we will take the under on that.
