BoC Meeting Today
Spanish bonds rallied for a second consecutive day after Draghi’s comments that the ECB could buy sovereign bonds with maturities of up to three years. The 3y yields were down by 50bp while the 10y dropped by 28bp on Tuesday. Risk appetite otherwise remained soft with equities in Europe and the US down marginally. The press conference following the meeting between French President Hollande and Italian Prime Minister Monti did not throw any surprises, keeping EURUSD in a tight range above 1.255. ECB Executive Board member Asmussen proposed that bank supervision by the ECB should be a “pre-condition for receiving ESM aid”. He added it is “unrealistic” to expect a supervisory mechanism for all banks to be in place by January 2013. The European Commission is expected to deliver its proposals for single banking supervisory authority next week. In the US, manufacturing ISM index came in soft at 49.6 against a consensus estimate of 50.0, with the employment component, new orders and export orders falling marginally. Notwithstanding the knee-jerk reaction, USD was largely unmoved by the weak report as markets remain focused on tomorrow’s ECB meeting and Friday’s payroll numbers. The BoC monetary policy meeting is due today. We expect the central bank to hold rates at 1.0% while maintaining its hawkish bias, despite relatively weak growth, employment and inflation numbers since its last meeting in July. Governor Carney recently noted that growth in Q3 may be slowed by “short-term special factors” and added that “modest withdrawal” of the stimulus may become appropriate. Considering that the housing sector is showing signs of cooling and the BoC expects inflation to rise to 2.0% only in 2013, we expect the central bank to remain on the sidelines this year. Also on tap today are Australian Q2 GDP data and Hollande’s meeting with EU President Van Rompuy. Our Australian economists expect a solid GDP number of 0.7% m/m and 3.6% y/y, supported mainly by strong retail spending, equipment capex and exports.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank