Markets
All eyes were on the ECB today. A poor German IFO this morning only illustrated that further ECB stimulus might be needed in the near future. Part of the market anticipated that the ECB could already take preemptive action today. However, that didn’t occur. The ECB left its main policy rates unchanged. But the bank changed its forward guidance and now expects the key ECB interest rates to remain at their present OR lower levels at least through the first half of 2020. In an additional paragraph, the bank stressed the need for ample policy accommodation as inflation has been persistently below its policy target. With respect to this target, the bank also formally stated that it aims inflation to develop in a symmetrical way around the inflation target. The bank finally said that it has tasked Euro system committees to look into mitigating measures (e.g. tiered system) and at potential new asset purchases.
To summarize, the bank opened the door for a rate cut in September which (later?) can be accompanied by a restart of the assert purchase program. In its press conference, Draghi elaborated in debt on the economic context. Global international uncertainty is hurting the manufacturing hard, but the employment and wage growth continue to support domestic demand. In the Q&A the ECB president didn’t bring much concrete info on potential steps of further monetary easing. It is not that easy to specifically quantify market expectations on all these topics. However, it looks fair to assume that today’s ECB action was rather close to average market expectations.
Both the EMU interest rate markets and the euro showed some kind of buy-the-rumour, sell the fact reaction. Markets had largely anticipated on a soft ECB. German yields touched new all-time lows (10-yr, -0.42%) at the start of the ECB press conference. However, the decline of yields was (more than) reversed during the ECB press conference. German yields currently rise between 5.5 bp (30-y) and 3 bp (2-y). Peripheral yield spreads initially narrowed but this move was also reversed as core yields rebounded later. The picture is mixed with 10-y Greek spreads still slightly tighter, but Italy and Spain widening marginally (+2 bp). The US yield curve also bear steepened with yields rising between 4 bp (2-y) and 5 bp (30-y). The move in US yields was mainly driven by the price swings in Bunds, but solid US durable goods orders probably also played a role. The euro briefly jumped higher as the ECB left its policy rate unchanged, but gains evaporated as the bank eased its forward guidance said to be ready to act in line with reaching the inflation target in a symmetrical way. EUR/USD traded near the 1.1110/00 support at the start of the press conference. In line with the price action on the interest rate markets, Draghi apparently didn’t bring enough additional soft news. A EUR/USD short-squeeze started. EUR/USD trades currently again in the 1.1175 area.
UK PM Johnson preceded a first meeting of the new UK Cabinet and bought is political intentions before Parliament. He repeated that his cabinet UK will lead the UK out of the EU by October 31. He also said to have instructed the Chancellor of the Exchequer to make all funding available to prepare to country for the EU exit. However, for now he didn’t reveal any concrete Brexit roadmap. In this respect, the first communication of the new government didn’t bring much guidance for sterling trading. EUR/GBP hovered in a tight range near the recent lows near the 0.8920 pivot. EUR/GBP dropped temporary below the 0.89 big figure due the overall decline of the euro after the ECB policy decision, but rebound during the ECB press conference. EUR/GBP trades currently again in the 0.8950 area. Cable rebounded to the 1.25 area.
News Headlines
The Turkish central bank slashed rates with 425 bps to 19.75% vs. a cut to 21.50% expected. The CBRT adopted a cautious stance to “keep disinflation in track” (June CPI “cooled” to 15.72%) and pointed advanced central banks that are likely to easy policy. Knee-jerk losses of the Turkish lira didn’t last long however: EUR/TRY even trades slightly lower vs. opening.
