Market movers today
After an intense central bank day yesterday, the data calendar is fairly thin today and hence market focus will probably be on absorbing yest erday’s policy message from the ECB.
Russia. The cent ral bank (CBR) will release its decision today. While a 25bp cut to 8.25% is widely expected (Bloomberg consensus and Danske Bank), there is a possibility that the CBR could do more and deliver a 50bp cut , or do nothing and keep the key rate unchanged. However, a cautious cut would be well justified, in our view, given that inflation has hit its post -Soviet lowest at 3.0% y/y, falling far below the CBR’s t arget of 4.0% y/y. On t he other hand, inflation expectations remain st icky, declining marginally. The CBR has been cautiously hawkish in its inflation comments recently and are not concerned about the high real rates. In it s Friday’s statement , we expect the CBR to praise economic development, enhancing the need for firmer CPI, anchoring around the target in the long run. We expect the key rate to end up at 8.00% by end-2017.
US. We are due to get the first estimate of Q3 GDP growth today, which is likely to have been affected negatively by the hurricanes, making it more difficult to estimate. While the At lant a Fed’s GDP indicator says growth was 2.7% q/q AR, the New York Fed’s indicator says 1.7% q/q. Our est imate is 2.0% q/q AR. Even if we get a weak print , it should be temporary and it would not change our view that the US is in the middle of an expansion. Of interest is also the PCE core number where consensus is looking for 1.3% q/q AR growth, up from 0.9% in Q2.
Selected market news
ECB extends QE but halves the pace. As broadly expected in the market and in line with our forecast , the ECB yesterday announced an extension of its QE programme by nine months unt il September 2018, albeit at a reduced pace of EUR30bn compared to EUR60bn current ly. Importantly, the ECB also left its forward guidance unchanged and retained the possibility to extend the QE programme in size and/or durat ion, leaving it open-ended. Furthermore, ECB reiterated that policy rates will remain at their current levels for an extended period of t ime and well past the horizon of asset purchases. The ECB also released further details on the reinvestments of maturing bonds that are made alongside new QE purchases and which wil l become increasingly sizable over the course of 2018. See our ECB review for further details.
Weaker euro, support to bond markets . The market react ion in the wake of the meet ing suggests t raders had posit ioned for a more hawkish tone at the press conference. The euro weakened and around the t ime of the European market close, EUR/USD had fallen by around 1% to 1.1650. European fixed income rallied, benefitting peripheral markets the most with, e.g. Spanish and Italian 10Y yields falling 9bp and 7bp respect ively into the close.
Oil prices rallied late yesterday. The price on Brent crude topped USD59/bbl on the news that the House in the US passed a bill on non-nuclear sanct ions on Iran. The oil market is concerned that the harder stance on Iran could eventually lead to a repeal of the 2015 nuclear deal and reinst at ement of sanctions on Iran’s oil exports.
