Markets
Trading centered around two things today: October EMU PMI’s and the ECB meeting. French PMI’s were released first. They rebounded more than expected in October, with especially services (52.9 from 51.1) showing quite some advance. This bounce needs to be interpreted against the background of fears that weakness from the export-oriented manufacturing sector could spill to the domestically-oriented, larger, services industries. Investors welcomed the French PMI’s by sending European yields, stocks and EUR/USD higher. Their optimism proved short-lived as German numbers remained near cycle lows (41.9 for manufacturing & 51.2 for services), dashing hopes of a return to growth in Germany in Q4. Details show that manufacturing remains the weak link, though there are some signs of encouragement with rates of decline in production and new orders easing and business confidence improving to a 4-month high. Signs of increasing strain in the domestic economy are more concerning. Employment fell below the 50 boom/bust mark for the first time in six years. Moves on FX and FI markets were immediately undone following German PMI’s, which were later confirmed by the EMU numbers (45.7 for manufacturing and 51.8 for services) after which a more sideways trading pattern developed ahead of ECB President Draghi’s final Q&A session following the central bank’s policy meeting.
The ECB kept its monetary policy unchanged. ECB President Draghi stressed that the central bank’s highly accommodative stance is necessary for a prolonged period because of protracted weakness in the EMU economy and the very slow transition from underlying inflation towards the central bank’s symmetric 2% inflation target. Risks to economic growth remain tilted to the downside, stemming from geopolitics, rising protectionism and vulnerabilities in emerging markets. Draghi made another shout-out to governments to push through structural reforms and use an active fiscal policy to raise the long term growth potential. An active fiscal policy could eventually facilitate a faster return to higher policy rates, even if monetary policy would stay highly accommodative in the early stages of such fiscal policy. EUR/USD and European rates temporary rose during the Q&A session. The move started when Draghi said that markets understood the ECB’s reaction function which is kind of sarcastic as the stronger euro (1.1150) and steeper curve (up to 2 bps for Germany) suggest that the ECB is out of ammunition. Sterling markets await tomorrow’s advice by the EU on the length of the brexit extension. (EUR/GBP 0.8640).
News Headlines
Sweden’s Riksbank stunned markets as it stuck to its plan to “most probably” raise its main repo rate from -0.25% to 0% at its December monetary policy meeting despite economic and geopolitical headwinds. By doing so, Riksbank is going against the grain as world’s major central banks are in easing mode. The hawkish announcement shows that the bank seeks to leave the negative interest rate territory at almost any cost. The Swedish krona jumped after the announcement and its 10-y yield turned positive for the first time since late July.
Norway’s central bank, as expected, stands pat and left its key rate unchanged at 1.50%. The central bank stressed that interest rates will remain at their current level in the “coming period” while the historically weak krone poses an inflation risk. Norges Bank last month raised rates for a fourth time in a year amid solid domestic growth, but said further tightening was unlikely as the global economy gradually slows.
Turkey’s central bank surprised by slashing its policy rate by 2.5% to 14%, exceeding forecasts of a 1% cut. The slowing inflation and US president Trump’s decision on Wednesday to lift economic sanctions on Turkey for its military offensive in Syria, helped the lira gain some ground and provided space for the central bank to extend its easing cycle. The lira slipped as much as 0.6% against the dollar after the rate announcement.
