- European equities moved higher in the morning session, but gave back the gains in the afternoon session, both before and after Draghi’s press conference. US equities open little changed awaiting former FBI’s Comey testimony.
- The ECB kept its policy unchanged, but removed its easing bias on rates because the ECB no longer takes deflation risk into account. New staff forecasts showed upward revisions to GDP and downward revision for CPI. Risks to the eco outlook are now balanced and no longer tilted to the downside.
- Q1 EMU GDP growth was upwardly revised from 0.5% Q/Q to 0.6% Q/Q, the fastest pace since 2015. Details showed that investments contributed significantly, 1.3% Q/Q, following an upwardly revised 3.4% Q/Q in Q4 2016. Consumption rose by 0.3% Q/Q and government expenditure by 0.4% Q/Q. Net exports declined by 0.1% Q/Q.
- German industrial production rose more than predicted in April (0.8% M/M from upwardly revised -0.1% M/M in March), with a fourth consecutive increase in manufacturing adding to signs of underlying strength in Europe’s largest economy.
- The US labor market remains a bright spot in the economy as fewer Americans filed for unemployment benefits last week, with hiring managers decrying a scarcity of available workers, Labour Department data showed. Weekly jobless claims declined from 255k to 245k (vs 240k expected).
- Italy’s biggest banks may help Rome bail out Popolare di Vicenza and Veneto Banca to avoid being hit by costly depositor guarantees if European regulators shut them down, sources close to the matter said.
- Italy moved away from a possible early vote this year after a multi-party agreement on a new election law failed to hold up in parliament. Senior lawmakers from the ruling centre-left PD blamed the opposition Five Star Movement’s lawmakers for voting in favour of an amendment to the bill that had not been previously agreed upon.
Rates
ECB stresses subdued inflation; no hurry to normalize
Global core bonds parted ways today. The US Note future trades near opening levels while the German Bund outperformed as the ECB cut its inflation forecast and doesn’t seem to be in a hurry to normalize policy despite tiny steps on the forward guidance. Good EMU and US eco data had no impact on trading. At the time of writing, the German yield curve bull flattens with yields 1.1 bp (2-yr) to 4 bps (30-yr) lower. Changes on the US yield curve vary between -0.1 bp (30-yr) and + 0.9 bps bps (10-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany narrowed up to 3 bps with Spain, Portugal (-9 bps) and Italy (-12 bps) outperforming. Italian BTP’s performed strong as Italian early election plans took a snag (see headlines).
The ECB kept its monetary policy unchanged, but altered its forward guidance by removing its easing bias regarding policy rates. The Governing Council now expects its key policy rates to remain at present levels for an extended period of time. Previously, the guidance stated "at present OR LOWER levels". The omission reflects the fact that the ECB no longer fears deflation risk. Asset purchases on the other hand are expected to run at least until December 2017 or beyond that date if necessary (in case things turn less favourable). The central bank didn’t discuss policy normalization/tapering and Draghi managed to keep expectations about such potential action in September very low key.
The ECB’s main argument to hold a very easy monetary policy remains subdued underlying inflation pressure. The new June staff forecasts also downgraded inflation projections in 2017 (from 1.7% to 1.5%), 2018 (1.6% to 1.3%) and 2019 (1.7% to 1.6%) even if Draghi admitted that this was almost entirely due to lower oil prices. Somewhat confusing, the central bank governor also said that the ECB is increasingly confident that EMU inflation will reach its 2% target in a durable way. The central bank is more optimistic on economic growth which continues to gain momentum. New GDP forecast increased for 2017, 2018 and 2019 by 0.1% percentage point to 1.8%, 1.7% and 1.6% respectively. More importantly, the ECB now thinks that risks to its economic scenario are balanced and no longer tilted to the downside.
The Irish Treasury (NTMA) successfully tapped the on the run 10-yr IGB (€0.7B 1% May2026) and 30-yr IGB (2% Feb2045) for a combined €1B, the maximum amount of offer. The auction bid cover was a strong 2.12. With the completion of today’s auction, the NTMA has issued €8.75B bonds, compared to its stated target range of €9-13B in the bond markets this year.
Currencies
EUR/USD off the recent highs as Draghi stays soft
The ECB’s policy statement was the first in a series of key market events. The ECB made only an incremental step to policy normalisation. Markets were apparently positioned for a slightly bigger step. EUR/USD lost modest further ground during the ECB’s press conference and trades currently at 1.1220. USD/JPY maintains most of this morning’s technical rebound. The pair is trading in the 110 area going into the testimony of former FBI boss Comey before the Senate.
Overnight, Asian equities traded with modest gains. Good Chinese trade data gave investors some comfort even as the focus was on the ECB and on Comey’s testimony. USD/JPY tested the 110 barrier early in Asia, but returned to the mid 109.50 area as the equity momentum eased. EUR/USD also traded little changed in the 1.1250 area.
European stocks opened with modest gains. Initially, the USD showed no clear trend, but it gradually found a better bid in technical trade. EMU Q1 growth was revised higher to 0.6% Q/Q and 1.9% Y/Y (from 0.5% and 1.7%). However, the report didn’t help the euro. USD strength prevailed. USD/JPY rebounded to the 110 area. EUR/USD dropped to the 1.1230/40 area.
The ECB as expected left its policy rates and the pace of asset purchases unchanged. The ECB raised its growth outlook and changed the balance of risks to growth to balanced. Draghi omitted guidance that interest rates might be cut further. At the same time, the ECB also lowered the inflation forecast for the policy horizon. In the end, the ECB didn’t give any clear guidance on an imminent policy tightening. The changes to the assessment were limited. European yields declined a few basis points during the ECB’s press conference and EUR/USD dropped temporary to the 1.12 area. Markets apparently expected the ECB to have come a bit closer to a next step in the normalisation process. The focus on markets now turns to the Comey testimony before a US sentiment committee. For now, markets apparently don’t expect any lasting harm for team Trump. The dollar is holding near the intraday highs against the euro (EUR/USD currently at 1.1220) and yen (USD/JPY 110.05/10).
Sterling going nowhere, awaiting election result
Sterling traders had quite a boring trading session as markets awaited the outcome of the UK Parliamentary election. Especially EUR/GBP trading developed in an extremely tight range in the 0.8665/0.8700 area. Remarkably, EUR/GBP was hardly affected by the EUR/USD decline during the ECB press conference. On the other hand, cable to a large extent followed the EUR/USD decline even as part of this move was ECB-driven. In the end, today’s intraday moves will probably be insignificant once the election result is available. EUR/GBP trades currently in the 0.8680 area. Cable is changing hands in the 1.2920 area.
