The European Central Bank bought EUR 1.7 billion of covered bonds last week, according to yesterday’s release. This is the baby steps phase to be sure, but these are real asset purchases that are adding to the ECB’s balance sheet and the rate of growth in these purchases in coming weeks/months will be critical for projecting the ECB’s success in its intention to buy perhaps a trillion euro in assets.
Bank of Japan governor Haruhiko Kuroda delivered a speech to Japan’s parliament overnight suggesting that the 2% inflation target would be largely met around the end of this fiscal year (April 1, 2015) and that the BoJ would subsequently need to begin discussing an exit strategy.
Both he and deputy governor Kazumata Iwata underlined that the BoJ’s programme is not on a preset timetable. Japan’s retail sales results for September were very strong, while the small business confidence October index disappointed with a slight drop, though it’s been fairly stable after bouncing from the plunge after the sales tax hike implementation earlier this year. USDJPY trades nervously between the 107.50 support and the 108.30 resistance.
With yesterday’s big dip in the Swedish krona, we now have to see the Riksbank deliver the dovish guidance today and cut by at least 15 bps if not 20 bps (which would bring the rate to effective zero at 0.05%). Specifically, something along the lines of expressing a willingness to reach for unconventional tools if disinflation continues to tilt toward deflation in the months ahead.
With a weak core Europe and Sweden’s traditionally export-dependent economy also in the midst of an epic housing bubble that was already painfully evident years ago, Sweden is not in an enviable position. And an unwinding of the housing bubble – inevitable if on an unknown timeframe – only adds to the potential for deflationary forces gathering strength.
Rainclouds are gathering for the Swedish economy. Photo: Judson
Chart: EURSEK
EURSEK ripped higher yesterday in anticipation of a dovish Riksbank today. Note in the big picture on the weekly chart below the important 9.35 area that has provided a rough resistance level all the way back to 2010. A break above here could see a test toward 9.50 and even 10.00 eventually, though the latter might need a dose of weak risk appetite to drive such an extensive move. 
Source: Bloomberg, Saxo Bank
Tomorrow’s FOMC
As mentioned yesterday, the market has shoved back anticipation of the first Fed rate hike well into the second half of next year after the mention of the USD in the FOMC minutes and after a weak retail sales release and generally low US inflation readings (with anticipation that sharply lower oil prices will continue to drive inflation lower still.
At tomorrow’s FOMC meeting, which will only see the release of a new monetary policy statement, the Fed may do little to encourage or discourage the market’s read on its intentions and it may largely offer up a passive assessment of the economy. The dovish risk is a significant downgrade, or expression of worry on the inflation outlook.
So within the overall USD bull market here, there is certainly the risk of a distraction and further consolidation lower in the USD for a few days or a couple of weeks before it gets back on track, but the dovish bar is rather high considering how far out of the water the market has already blasted the Fed’s own mid-September median projections of the policy rate next year.
Today’s Riksbank policy statement and interest rate decision at 0830 GMT will be followed by a press conference at 1000. Later in the US, we have September durable goods orders, which are a minor distraction, followed by October consumer confidence. The latter may have dropped precipitously in September due to the ISIS beheadings, and ebola concerns may be scaring those surveyed in October, so it may be difficult to get a “clean” reading on confidence due to these one-off factors, which are likely to fade quickly once the media move on to the next news story.
Stay careful out there.
Economic Data Highlights
- Japan Sep. Retail Sales out at +2.7% MoM and +2.3% YoY vs. +0.9%/+0.8% expected, respectively and vs. +1.2% YoY in Aug.
- Japan Oct. Small Business Confidence declined to 47.4 vs. 48.5 expected and 47.6 in Sep.
Upcoming Economic Calendar Highlights (all times GMT)
- Sweden Riksbank Interest Rate Announcement (0830)
- Sweden Sep. PPI (0830)
- Sweden Sep. Retail Sales (0830)
- Norway Norges Bank releases Financial Stability Report (0900)
- Sweden Riksbank press conference on interest rate decision (1000)
- US Sep. Durable Goods Orders (1230)
- Hungary Central Bank Interest Rate Decision (1300)
- US Aug. S&P CaseShiller Home Price Index (1300)
- US Oct. Consumer Confidence (1400)
- US Oct. Richmond Fed Index (1400)
- UK BoE’s Cunliffe to Speak (1730)
- Japan Sep. Industrial Production (2350)
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