A tale of two central banks’ indecision and flops
Wednesday was a very skittish and haphazard day with regards to policy decisions and high impact news events. The strangest story came by way of the ECB and the various mandarins and apparatchiks hovering at the heart of its mechanism. It was incredibly hard to keep track of the mutterings coming from so many directions. In many ways you could be forgiven for actually feeling pity for Mario Draghi as herding cats would be a less difficult job than trying to get his colleagues in the ECB to all sing from the same hymn sheet. Here was a taste of the multi direction(less) reports and quotes emanating from the ECB…
ECB’s Hansson stated that ECB should consider QE. ECB’s Noyer then stated that it was “Logical” For the US Dollar to Appreciate Vs Euro. Draghi said Bank union could lead to stronger financial integration whilst ECB’s Coeure stated that the ECB is considering a negative deposit rate “very seriously”.
This unprecedented melee led to EUR/USD collapsing through support to breach S2 to then recover to sit on the S2 level towards the end of the day. Many traders in the retail space were left fuming and it’s hard not to sympathize. As if our profession isn’t hard enough the last thing we need is an ECB official spouting errant nonsense when questioned or blurting out unwarranted nonsense.
In other central bank news the UK’s BoE was equally all over the place on Wednesday. Having previously pledged, through its so called forward guidance, to increase interest rates when/if unemployment fell to 7%, now that the unemployment figure is actually at 7.1% – within 0.1% of triggering the rate rise, suddenly the BoE has changed its mind and all that previous forward guidance means nothing. The reaction of sterling was immediate, eventually crashing through R2 on its way to R3…
The Bank of England revised its forward guidance on interest rates, pledging not to raise interest rates until the UK economy has recovered most of the ground lost during the financial crisis. They’re now suggesting that the first interest rate rise could come in just over a year’s time, in the second quarter of 2015. The new policy was unveiled as the Bank conceded that its original guidance, released just six months ago, needed to ‘evolve’ as the UK unemployment rate has fallen more sharply than expected.
There’s no single trigger for a rate rise putting the BoE closer to other central banks. Governor Mark Carney denied that forward guidance was a flop, saying that the policy had given businesses the confidence to invest.
He also insisted that future rate rises would be gradual, and did not see a return to historic averages (5%) for some time. The Bank also hiked its growth forecasts, seeing GDP rising by 3.4% this year. And its chief economist, Spencer Dale, predicted that wages will probably finally rise faster than inflation by the end of this year.
Royal Bank of Scotland has seen its debt and long term rating put on review for downgrade by Moody’s
During the review, Moody’s will assess whether the bank’s credit fundamentals remain compatible with the current ratings given the challenges and risks RBS faces in relation to the execution of its recovery plan and any actions that RBS’s management could pursue in the short-term that could effectively mitigate these risks and further boost the bank’s regulatory capital position.
CBI likes the look of Forward Guidance version 2
The CBI chief policy director, Katja Hall, agrees that there’s still a significant output gap in the UK economy:
Forward guidance has clearly been effective in influencing companies’ expectations of when interest rates will rise and in cementing their confidence in the recovery. The Bank’s new guidance will give businesses further peace of mind that interest rates will stay low for some time, until investment and incomes are growing at sustainable rates. And the Bank has made clear that even when the economy is operating at more normal levels, rates will only increase gradually.
Market overview at 10:30 PM UK time
The DJIA closed down 0.19%. SPX down 0.03% and the NASDAQ up 0.24%. In Europe the STOXX index closed up 0.58%, CAC up 0.52%, DAX up 0.65% and the FTSE up 0.04%.
Looking towards market openings on Thursday the DJIA equity index future is currently (at the time of writing (10:30 PM UK time February 12th) up 0.08%, SPX up 0.18%, NASDAQ up 0.27%. Euro STOXX future is up 0.62%, DAX up 0.68%, CAC up 0.63% and the FTSE up 0.39%.
NYMEX WTI oil finished the day up 0.35% at $100.29 per barrel, NYMEX nat gas up 0.56% at $4.85 per therm. COMEX gold finished the day up 0.09% at $1291.00 per ounce with silver on COMEX up 0.26% at $20.20 per ounce.
Forex focus
The euro dropped 0.3 percent to $1.3593 late New York time, after climbing to $1.3683 yesterday, the highest since Jan. 29th. The shared currency lost 0.5 percent to 139.33 yen, the first decline in five days. The dollar fell 0.1 percent to 102.51 yen. The euro fell for a second day against the dollar as weaker-than-forecast factory output in the region in December prompted speculation that the European Central Bank may consider further monetary stimulus.
The pound strengthened 0.9 percent to $1.6597. Sterling advanced 1.2 percent to 81.91 pence per euro, reaching the steepest climb since Dec. 18th. The pound rose for a second day versus the dollar and euro on speculation Bank of England Governor Mark Carney will struggle to hold down interest rates as the U.K. economy improves. The central bank expects fourth-quarter growth to be revised up to 0.9 percent from the 0.7 percent estimated by the statistics office, and forecast a similar pace of expansion this quarter. For the full-year 2014, it raised its projection to 3.4 percent from 2.8 percent in November.
The euro has lost 0.8 percent this year, the worst performer after the Canadian dollar among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar has gained 0.4 percent and the yen has risen 3.4 percent, the biggest gainer.
Bonds briefing
The current 10-year note yield rose four basis points, or 0.04 percentage point, to 2.76 percent late New York time. It touched 2.78 percent, the highest level since Jan. 29th, after dropping to 2.57 percent on Feb. 3, the lowest since Nov. 1. The price of the 2.75 percent security due in November 2023 dropped 10/32, or $3.13 per $1,000 face amount, to 99 29/32. Treasuries fell, pushing 10-year note yields to a two-week high, as the U.S. sold $24 billion of the securities a day after Federal Reserve Chairman Janet Yellen said the central bank remains on course to taper bond purchases. Treasuries fell, pushing 10-year note yields to a two-week high, as the U.S. sold $24 billion of the securities a day after Federal Reserve Chairman Janet Yellen said the central bank remains on course to taper bond purchases.
Spanish 10-year yield climbed five basis points, or 0.05 percentage points, to 3.65 percent at the 5 p.m. close of trading in London after dropping to 3.58 percent on Feb. 10th, the lowest level since March 2006. The 3.8 percent bond due in April 2024 fell 0.445, or 4.45 euros per 1,000-euro ($1,359) face amount, to 101.25. Italy’s 10-year yield rose five basis points 3.73 percent after falling to 3.66 percent, the least since February 2006. Spain’s government bonds declined for a second day amid signs a rally that pushed 10-year yields to the lowest level since 2006 is losing momentum.
Fundamental policy decisions and high impact news events for February 13th
Thursday sees Australia’s inflation from the Melbourne Institute published, expected in at 2.3%, similar to previous readings. From the UK we receive the RICS house price balance, with 59% of surveyors expected to have seen house price rises. In Australia we expect to see employment up 15.3K from the previous month’s negative print, with unemployment to come in at 5.9%. The two RBA deputy governors will also speak after the release of this employment data.
In Europe the ECB’s monthly bulletin will be published, whilst the Swiss PPI inflation is expected to come in at -0.2%. Italy and the UK hold bond auctions.
As attention switches to the USA we receive data for core retail sales, expected in at 0.2% up. Retail sales are expected to be flat. With unemployment claims at 331K, business inventories are expected in at 0.4% up. The fed chairperson Yellen will once again testify.
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