The next two and half days bring us two of the most important central bank meetings in some time, particularly tomorrow’s ECB, as well as three of the most important US economic data points
The market refused to do much today, and with good reason as we have an onslaught of event risks approaching, including the US ISM Manufacturing survey out shortly (with the market more uncertain than ever on its status after yesterday’s relatively strong Chicago PMI, which came after a strong Empire survey earlier this month, but a very weak Philly and other manufacturing surveys. Then later today, we’re of course on to the highlight of the day, the FOMC meeting, which will merely be a new policy statement release rather than the full communication barrage of forecasts and Bernanke press conference, which we won’t see until next meeting.
Today’s Data
The world manufacturing PMI data has been distinctly uninspiring, as Asian surveys are looking weak (Korea came in at 47.2 vs. 49.4 prior, HSBC’s measure of Vietnamese manufacturing was at 43.6 vs. 46.6 prior and the Chinese HSBC remains just below 50. The Euro Zone Manufacturing PMI’s were generally revised slightly lower, though Spain saw an upside surprise at a still dreadful 42.3 (vs. 40.3 expected). The UK Manufacturing PMI was a very weak 45.4, missing expectations by. Then again, the UK hardly makes anything, anyway…
The stronger than expected US ADP survey, after yesterday’s strongish Chicago PMI and much better (though still bad) than expected Consumer Confidence reading makes for delicious counterpoint to all of the Fed easing hysteria after the prior march of almost uniformly negative numbers.
ECB preview: what’s the next flavour of QE?
After last week’s sharp comments on doing “whatever it takes” to save the euro, we can certainly expect an ECB move of some kind at this week’s meeting – but what is the market pricing in? The latter is hard to quantify and my general expectation is that almost regardless of what the ECB does (unless Draghi pulls out a larger bazooka than the market is already expecting), the topside potential is in the 1.2500-1.2600 range until proven otherwise.
The theoretical ability for the ECB to buy bonds/print money is infinite, it is rather the political constraints that are operating at all time on the ECB’s actions, and indeed on the entire systemic risk picture for EU banks and sovereigns. The technical solution the ECB arrives at is relatively unimportant beyond the very short term as we always loop back around to the original problem. But because the shape and form of tomorrow’s new ECB efforts are “news”, they are receiving, as usual, far too much focus.
Holding back the ECB are a Bundesbank that is not happy with SMP bond buying or the idea of the ESM being granted a banking licence and the fact that out and out QE is effectively off the table because it is politically contentious. But still, the ECB can choose from a palette of other technical extend-and-pretend solutions that may have varying degrees of short term effectiveness, like agreeing to boost the ability of country central banks to purchase private sector assets to boost bank capital and other potential measures.
Regardless, in the longer run, whether that is two days, two weeks or even (in a miracle) two months, it will still come back to whether the EU can pull together politically and execute a restructuring of its still vastly overleveraged banking system and the problem of its sovereign debt and the overall fragility of the union framework.
FOMC
I penned a piece yesterday on what to expect from today’s FOMC for those who missed it.
Be careful out there.
Economic Data Highlights
- Australia Jul. AiG Performance of Manufacturing Index out at 40.3 vs. 47.2 in Jun.
- China Jul. Manufacturing PMI out at 50.1 vs. 50.5 expected and 50.2 in Jun.
- China Jul. HSBC Manufacturing PMI out at 49.3 vs. 48.2 in Jun.
- UK Jul. Nationwide House Prices out at -0.7% MoM and -2.6% YoY vs. -0.2%/-1.9% expected, respectively and vs. -1.5% YoY in Jun.
- Sweden Jul. Swedbank PMI out at 50.6 vs. 47.7 expected and 48.4 in Jun.
- Norway Jul. PMI out at 48.7 vs. 49.0 expected and 46.5 in Jun.
- Euro Zone Jul. Manufacturing PMI revised down to 44.0 vs. 44.1 original estimate and 45.0 in Jun.
- UK Jul. Manufacturing PMI out at 45.4 vs. 48.4 expected and 48.4 in Jun.
- UK Jul. ADP Employment Change out at 163k vs. 120k expected and 172k in Jun.
- US Jul. ISM Manufacturing (1400)
- US Jun. Construction Spending (1400)
- US Weekly DoE Crude Oil and Product Inventories (1430)