A bit of consensus has been developing that reality will have a hard time living up to the hype surrounding the real future trajectory of ECB policy. So far, there is little to take away from Trichet’s press conference performance as we look to see whether the 1.4250 support holds.
Ahead of the ECB decision today, EURUSD consolidated its gains after breaking higher yesterday and EURGBP dipped sharply into the Bank of England announcement. With the Bank of England out of the way with its “pass” and traditional radio silence on its thought process (as it usually releases no statement in the wake of its decisions) EURGBP rebounded to price out the small minority looking for a rate move from King and company. This left the focus on Trichet’s press conference today for guidance on whether the market’s expectations for 100+ basis points of tightening for the coming 12 months are justified since the ECB’s hike was so thoroughly telegraphed today that there was little reaction to the 25-bp hike announcement crossing the wires.
Trichet did his utmost to put us all to sleep at the press conference, saying little that the market could grab on to for forward guidance. His words on inflation show that headline inflation risks are what count in his book rather than the core inflation that is the US Fed’s sole obsession. (no surprise on this after the July 2008 ECB decision to hike 25 bps on spiking crude followed by 375 bps of hasty easing in the ensuing 6 months as the global financial crisis hit). Too early to draw any conclusions, but Euribor futures were relatively flat about 30 minutes after the start of the Trichet press conference (though several ticks off the lows during the conference after Trichet says that it wasn’t decided that this is the first of a series of hikes) supporting neither an additional rally for the Euro nor any large scale consolidation (though the rate spreads never supported the rally to new highs in the first place – this is all an interesting test of Euro sentiment).
Chart: ECB vs. Fed policy rates
This chart was flashed on the news this morning and the consensus has long been that the US economic cycle and policy response tends to lead that of the rest of the world. This time around, Europe is moving more quickly on the policy side as its economy (or at least the core of its economy in Germany) has recovered more convincingly than that of the US. Going forward, the grand question will be whether the US is dangerously behind the curve on moving rates and risks a disorderly debasement of the purchasing value of its currency due to Fed policies or whether the ECB’s tightness proves premature and growth and the banking system in Europe turn sharply south and create new deflationary forces that see the ECB having to reverse course before the Fed ever moves.
This chart was flashed on the news this morning and the consensus has long been that the US economic cycle and policy response tends to lead that of the rest of the world. This time around, Europe is moving more quickly on the policy side as its economy (or at least the core of its economy in Germany) has recovered more convincingly than that of the US. Going forward, the grand question will be whether the US is dangerously behind the curve on moving rates and risks a disorderly debasement of the purchasing value of its currency due to Fed policies or whether the ECB’s tightness proves premature and growth and the banking system in Europe turn sharply south and create new deflationary forces that see the ECB having to reverse course before the Fed ever moves.
Odds and ends
The news that Portugal would formally request a bailout late yesterday was met with a collective shrug as this was apparently fully priced into the situation. A Bloomberg article suggests that even as Portugal has to reach for the bailout lever, the situation in Spain has been improving: as the market remains sure that the EuroZone sovereign debt woes will not spread beyond the three little PIGs. We have long suggested that the restructuring risk is not priced in, but the market isn’t looking at this at the moment. Still, it’s out there….
The news that Portugal would formally request a bailout late yesterday was met with a collective shrug as this was apparently fully priced into the situation. A Bloomberg article suggests that even as Portugal has to reach for the bailout lever, the situation in Spain has been improving: as the market remains sure that the EuroZone sovereign debt woes will not spread beyond the three little PIGs. We have long suggested that the restructuring risk is not priced in, but the market isn’t looking at this at the moment. Still, it’s out there….
Australia’s employment report was very strong after the weak number in February, with noteworthy growth in full time positions and an improvement in the unemployment rate despite an increase in the labor participation rate. AUDUSD took out the 1.05 level, where barrier options may have been lurking. Copper is back at the higher end of the recent range, providing some measure of additional support for the very strong Aussie. The March construction survey was catastrophically bad, but all bad data is shrugged of as “a result of the floods”.
US jobless claims came in slightly better than expected, keeping the gently improving trend intact.
Looking ahead
With these central bank meetings out of the way, the focus shifts to the potential US government shutdown and whether it represents a real risk or simply a few days of political posturing before some kind of compromise is reached within a week or so. After one meeting yesterday between Obama and Republican representatives appeared to suggest that negotiations on the budget were failing, a meeting late yesterday apparently opened the door of compromise by at least a crack.
With these central bank meetings out of the way, the focus shifts to the potential US government shutdown and whether it represents a real risk or simply a few days of political posturing before some kind of compromise is reached within a week or so. After one meeting yesterday between Obama and Republican representatives appeared to suggest that negotiations on the budget were failing, a meeting late yesterday apparently opened the door of compromise by at least a crack.
Also interesting in the pipeline for next week in the US is the auction schedule, as we have 3-, 10-, and 30-year treasuries on the block after the recent run-up in yields.
In the meantime on the economic calendar, we have the latest weekly US Bloomberg Consumer Comfort report (formerly the ABC survey) which will tell us how comfortable US consumers are with the recent runup in gasoline and food prices. Tomorrow we have the Canadian employment report for March.
Economic Data Highlights
- Australia Mar. Performance of Construction Index out at 39.4 vs. 44.6 in Feb.
- Australia Mar. Employment Change out at 37.8k vs. 24.k expected and -8.6k in Feb.
- Australia Mar. Unemployment Rate out at 4.9% vs. 5.0% expected and 5.0% in Feb.
- Australia Mar. Participation rate rose to 65.8% from 65.7%
- Japan Bank of Japan left rate unchanged at 0.10% as expected
- Sweden Feb. Service Production out at +0.3% MoM and +5.8% YoY vs. +5.6% YoY expected and 4.8% in Jan.
- Norway Feb. Industrial Production out at -0.3% MoM and +2.0% YoY vs. +0.5%/+3.0% expected, respectively and vs. 3.3% YoY in Jan.
- Germany Feb. Industrial Production out at +1.6% MoM and +14.8% YoY vs. +0.5%/+13.2% expected, respectively and vs. +12.7% YoY in Jan.
- UK Bank of England left rates unchanged at 0.50% and Asset Purchase Target unchanged at £200B as expected
- EuroZone ECB raised rates 25 bps to 1.25% as expected
- Canada Feb. Building Permits out at +9.9% MoM vs. +1.3% expected and -6.6% in Jan.
- US Weekly Initial Jobless Claims out at 382k vs. 385k expected and 392k (revised up from 388k) last week
- US Weekly Continuing Claims out at 3723k vs. 3700k expected and 3732k last week
Upcoming Economic Calendar Highlights (all times GMT)
- US Weekly Bloomberg Consumer Comfort Index (1345)
- US Feb. Consumer Credit (1900)
- Japan Feb. Current Account Total (2350)
- Japan Mar. Eco Watchers Survey (0500)
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