• Today’s menu is ECB, BoE and Spanish auction
• Next step in Portugal is keeping the government together
• Strong numbers yesterday
• Riksbank stays on hold as expected
• ECB preview: Monetary exit remains very distant
• BoE preview: The King has left the building
Today is ECB and Bank of England day. We expect no new actions. Moreover, there is a Spanish bond auction today.
Yesterday, markets were focussed on Portugal, which saw its sovereign bonds sell off for the second day. 10Y government bond yields are hovering close to 8%, some 150bp higher than on Monday. It seems that the next step will be talks between the prime minister, who is in Berlin at the moment, and the (ex) foreign minister and leader of the junior coalition partner about common grounds for the government going forward. There is probably not a lot of room to manoeuvre given the strict terms of the international bailout. Bunds moved too, but currently trade roughly unchanged compared with the same time yesterday.
Strong numbers yesterday
Yesterday’s numbers were generally strong. ADP employment, however useless an indicator it may be, gave markets some hope of a strong payrolls report tomorrow, and while the ISM non-manufacturing dropped significantly on most sub-components, the employment part saw a clear improvement. In the Euro area, retail sales numbers surprised significantly to the upside. You will probably not believe me, but given the significant improvement in consumer confidence and retail sales recently, private consumption was probably much stronger (less weak) than previously expected in Q2. Finally, in the UK, PMI’s continue to power ahead suggesting a significant improvement in growth momentum in Q2.
Riksbank stays on hold as expected
The Riksbank stayed on hold and kept the rate path roughly unchanged. We stick to our forecast that there will be no more rate cuts in this cycle and that the next step from the Riksbank will be a rate hike in 2014. In total we forecast two rate hikes in 2014, leaving the repo rate at 1.50 at year-end. Our risk assessment for 2013 still remains somewhat biased to a lower repo rate primarily on the back of a risk for higher unemployment than the Riksbank’s forecast.
ECB preview: Monetary exit remains very distant
We expect the ECB to stay on hold, which is in line with the general perception. This week’s meeting will be about the implications of the sell-off in fixed-income markets. Draghi is likely to repeat that an ECB exit is very distant; that rates will rise at some point; while excessive rate rises in the periphery could be dealt with by activating the OMT. No immediate implementation of an ABS programme. That is a slight disappointment to us, but probably not a major issue for the markets. Inflation should be watched carefully during the autumn. It is a lagging indicator, but significantly lower inflation would be an indication that the initial view on the cause of the crisis and the crisis response was wrong, and could prompt much more aggressive ECB easing.
BoE preview: The King has left the building
Today’s MPC meeting will be the first chaired by the new Bank of England Governor and therefore potentially interesting even if recent economic developments do not give much reason to expect changes in the monetary policy stance. Yesterday’s PMI leave no doubt in our minds that there is no need for immediate easing. However, Mr Carney will probably want to show that there is a new guy in town.
Nordea