Market largely got what it expected with the Draghi press conference today – but market limbo may continue after today’s response to the ECB news as biggest event risks don’t arrive until next week.
AUD employment report ugly – AUD rises
Too much of a bad thing, apparently, for Aussie as a rather ugly employment report that showed a -8.8k drop in payrolls in August, failed to see the currency any weaker for now. The unemployment rate unexpectedly dropped to 5.1% instead of rising to 5.3%, but that was down to a 0.2% drop in the participation rate, which is “curiously” dropping to a new five year low, whether because of discouraged workers or some degree of demographic aging – probably more of the former. Without this development, the unemployment rate might be pushing back close to the 5.5% level or higher. In 2009, the unemployment rate peaked at 5.9%.
ECB saves the cut for later – outlines bond buying plans
Analysts were split fairly evenly on whether the ECB would cut by 25 bps today. One imagines that the “no cut” decision today is merely to have a tiny bit of something in reserve to appear as if they are “doing something” at future meetings.
The bigger focus was obviously on Draghi’s press conference, where Draghi promised that the ECB had decided “on the modalities of the purchase programme” and said that the ECB would fully back up the EMU, but underlined the importance of the policymakers’ role in a solution and the need for “strict conditionality”, i.e., that intervention is undertaken under the auspices of a country’s appeal for assistance from the EFSF/ESM. Draghi also revised ECB expectations for GDP growth sharply lower – to a mere +0.5% for 2013 vs. +1.0% previously.
There were few details of the bond buying programme beyond the outlines that were rather clear with yesterday’s news from ECB officials – 1 to 3 year maturities will be the focus of the bond buying (including longer dated maturities that have one to three years of run time remaining) and there will be no (declared) limits on the buying. The new plans will mean that the SMP will cease to exist, though the instruments it holds will be held until maturity. No surprise that there was a lone dissenter to the ECB’s decision, undoubtedly the Bundesbank’s Weidmann.
Conclusion: the writing is on the wall – the ECB will intervene to ensure that rates at the short end of the curve at the periphery don’t head back higher for now and the technical groundwork for doing so has been laid by today’s statements, provided the peripheral countries in question feel comfortable with the conditionality the ECB requires – the entire conditionality part is all about giving politicians as much buy in for the ECB’s actions as as possible. From here, the Euro may try to find one last round of support if it can take out the 1.2650 highs, but I don’t look for a sustainable EURUSD rally beyond next week or beyond 1.2750 to 1.2800. If the pair manages to work above that zone for more than a day or two, I will have to revisit my assumptions. To the downside, the 1.2500/1.2450 area is shaping up as the short term pivot zone.
EUR/CHF
Yes, the EURCHF is on the move, but I’m not willing to jump on board the idea of it moving higher just yet - the bigger test for the EURCHF comes next week with the German constitutional court etc. and how the overall sentiment levels do after today’s ECB meeting.
Riksbank cuts
The Riksbank cut the interest rate 25 bps to 1.25%, which a minority were expecting, though the disagreement was more one of timing rather than “whether” a cut would take place. The cut shouldn’t come as a huge surprise considering the sharp weakening of key numbers (Trade Balance and PMI’s, some of the other data has remained resilient) coming out of Sweden’s export economy and after the krona went through a period of aggravated strengthening versus the Euro before the latter’s recent bounce. Two year swap rates fell a few bps in response suggesting modest surprise. Strangely, the Riksbank revised higher its estimates for Swedish growth due to the expectations of stimulus from the rate cut, and also. Apparently, the Riksbank hasn’t read the balance sheet recession playbook made glaringly evident by the US and other countries over the last several years.
Looking ahead
The next few trading days are like a Tour de France stage with multiple mountain peaks. Tomorrow’s US employment report is perhaps a merely stage 3 climb in that regard because next Wednesday’s German Constitutional Court decision on the ESM rescue mechanism and the FOMC meeting on Thursday are the “beyond category” mountains that will decide this stage of the race for the Euro vs. he US dollar and for risk assets as well. (if I have mis-stated the day of the week of the next FOMC meeting in prior columns, my apologies, as I assumed it was on a Wednesday, even if I had the correct day of the month, the 13th in my head the entire time – since when does the FOMC announce anything on a Thursday at one of its regularly meetings?).
Another interesting development today was the weakness in bond markets globally, at least partially on the strong US ADP payrolls number and better than expected weekly claims number. This is seeing the JPY crosses perking up – particularly the most important one, USD/JPY. Stay tuned there.
Economic Data Highlights
- Australia Aug. Employment Change out at -8.8k vs. +5.0k expected and +11.7k in Jul.
- Australia Aug. Unemployment Rate out at 5.1% vs. 5.3% expected and 5.2% in Jul.
- UK Aug. Halifax House Price out at -0.4% MoM and -0.9% YoY vs. +0.2%/-0.8% expected, respectively and vs. -0.6% YoY in Jul.
- Sweden Jul. Service Production out at -0.6% MoM and +0.8% YoY vs. -0.3% MoM expected and +2.4% YoY in Jun.
- Sweden’s Riksbank cut rates by 25 bps to 1.25% vs. a majority who expected no change today.
- Germany Jul. Factory Orders out at +0.5% MoM and -4.5% YoY vs. +0.3%/-4.5% expected, respectively and vs. -7.6% YoY in Jun.
- UK BoE left rate and asset purchase target unchanged as expected
- ECB left interest rate unchanged at 0.75% vs. split consensus on whether they would cut 25 bps to 0.50%
- US Aug. Challenger Job Cuts out at -36.9% YoY vs. -44.5% in Jul.
- US Aug. ADP Employment Change out at +201k vs. +140k expected and +173k in Jul.
- US Weekly Initial Jobless Claims out at 365k vs. 370k expected and 377k last week
- US Weekly Continuing Claims out at 3322k vs. 3315k expected and 3328k last week.
- US Weekly Bloomberg Consumer Comfort Survey (1345)
- US ISM Non-manufacturing survey (1400)
- US Weekly DoE Crude Oil and Product Inventories (1500)
- Australia Aug. AiG Performance of Construction Index (2330)
- Australia Jul. Trade Balance (0130)