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Major Central Banks Now Engaged In Forward Guidance

ByDanske Markets
Published 07/08/2013, 03:17 AM
Updated 05/14/2017, 06:45 AM

Focus today will be on markets digesting Friday's strong payrolls out of the U.S. In light of what this means for Fed tapering its quantitative easing (QE) program. A first Fed hike is now priced by December 2014, which we think is somewhat early considering that the Fed has signaled it intends to move slowly. Indeed, given the limited liquidity in U.S. markets late last week due to the July 4th. holiday, there is a risk the Treasuries sell-off on payrolls may be corrected somewhat today and we could see US rates decline a little.

With major central banks now engaged in forward guidance, we are currently in an environment where markets need to price a data-dependent Fed exit contrasting with a time-dependent one from the ECB. The Fed should be the 'easy' one here, given its focus on labour-market developments and longer history of using forward guidance. The ECB is somewhat more tricky as markets will gradually have to deduce what Draghi means by low rates for an 'extended period'. This will likely be an overriding theme in the coming months with the ECB chairman steering markets through verbal communication - watch out for Draghi speaking this afternoon.

Some uncertainty in Europe remains in place ahead of today's Eurogroup meeting. Greece's negotiations with the troika over the country's loan tranche failed over the week and talks will resume today. The Portuguese government did a cabinet re-shuffle to end last week's crisis, but speculation is already rising that this may prove a temporary calm. Watch out for those peripheral spreads today for any signs the euro-debt crisis is smouldering again.

The earnings season is set to start with Alcoa reporting for Q2 today.

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