The USD was even having a hard time holding onto gains against sterling today, which weakened on a very negative GDP report for Q1. Has the market appropriately priced in the FOMC risks here?
Technical recession in the UK
A negative GDP print today from the UK vs. a small rise expected saw the pound hit for losses across the board for a time today – all the way to the 0.8220 area resistance (old low) in EURGBP. The sell-off in GBPUSD was fairly short lived as of this writing as the market seems to continue be looking for a dovish FOMC statement and Bernanke press conference today (more on that below). The market knocked a few more bps out of the expectations for UK rates to rise at the shorter end of the curve and one wonders how much higher the market can take the GBP-bullish view as the BoE is probably about to pull off the easing lever as the economy remains in negative growth mode. Trainwreck anyone?
Europe: weak German auction and Draghi speech
With German long yields edging back toward historic lows, bond buyers went a bit on strike today and the German auction of 30-year bonds failed to see the maximum target of EUR 3 billion reached, with only about 2.75 billion in bids. After the initial sell-off the market easily righted itself again, and peripheral bond yields headed generally tighter today, so the signal may be one of less safe haven-seeking and more relative value discovery for the moment rather than a sign that bond buyers are going on strike due to worries about Germany’s finances or the like.
Meanwhile, the ECB’s Draghi gave a speech to the European Parliament today with an interesting call for a “growth compact” (Remember that he provided the “fiscal compact” buzz phrase that led to the current fiscal compact agreement that has yet to be ratified by the EU members and is a bone of contention now that Spain has effectively flouted its rules and the Dutch government has gone down in flames on its failure to pass austerity measures. Meanwhile, the likely winner of the French presidential election Hollande has promised to renegotiate its terms.)
Judging from Mr. Draghi’s rhetoric, he seems to be trying to encourage labour reforms and other measures in this growth compact rather than backing off on the fiscal responsibility theme. It is certainly clear from this speech that the ECB president’s concern for the Euro Zone economy is far greater than in his past appearances (those shocking April flash PMI numbers are a likely contributor) and he declared that the SMP is “neither eternal nor infinite, but it has always been there”, suggesting it might be used in a pinch. Interestingly, Mr. Draghi came out very firmly (somewhat between the lines, but the meaning was clear) against the Financial Transaction tax in today’s speech, something that France and Germany have both favoured, particularly the incoming Hollande.
Were this not FOMC day, the market would likely have acted in a far more Euro-negative way than it did.
US Durable Goods Orders
The March US Durable Goods Orders headline number was awful, but this is a very volatile time series, and the negative core ex Transportation drop was far smaller than for the headline data and the core capital goods orders number was revised up to 2.8% MoM in Feb. before registering the March -0.8% drop. There’s no conclusion to be drawn when we have very good months in December and February interspersed with a very ugly December and a merely weak March.
Looking ahead
Today is all about the FOMC meeting and monetary policy statement as well as the welter of forecasts and Mr. Bernanke’s press conference after the meeting. I have the general feeling that the market is looking for a dovish performance today, but that we will get a rather non-committal performance and a fairly hawkish set of forecasts and few changes to the statement. Forecasts on inflation and employment will be upgraded due to the string of stronger numbers in recent months before the latest dip. There are too many hawks now among the FOMC member to see anything more than the introduction of a slightly wishy-washiness in the monetary policy statement on the description of the economy – I expect no changes to the policy hints section. No doubt Mr. Bernanke, however, will take the opportunity at the press conference to underline, however, that the Fed is ready to move if conditions warrant even if they don’t warrant at this time. There is a room for plenty of volatility.
Look out for the RBNZ rate decision up just a couple of hours after Bernanke’s press conference. The market has moved back to expecting almost nothing from the RBNZ over the next twelve months, so look out for guidance from Bollard and company.
Economic Data Highlights
UK Q1 GDP out at -0.2% QoQ and 0.0% YoY vs. +0.1%/+0.3% expected, respectively and vs. +0.5% YoY in Q4.
UK Feb. Index of Services out at -0.4% MoM vs. +0.2% expected
UK Apr. CBI Trends Total Orders out at -8 vs. -6 expected and -8 in Mar.
UK Apr. CBI Trends Selling Prices out at 7 vs. 26 expected and 24 in Mar.
US Mar. Durable Goods Orders out at -4.2% MoM and -1.1% ex Transportation, vs. -1.7%/+0.5% expected, respectively
US Mar. Capital Goods Orders ex-Aircraft and Non-Defense out at -0.8% MoM vs. +1.0% expected
Canada Feb. Teranet/National Bank Home Price Index fell -0.2% MoM and rose +6.1% YoY vs. +6.5% YoY in Jan.
Upcoming Economic Calendar Highlights (all times GMT)
US Weekly DoE Crude Oil and Product Inventories (1430)
US FOMC Rate Decision (1630)
US FOMC to Release Economic and Fed Funds Rate Projections (1800)
New Zealand RBNZ Cash Rate Decision (2100)
UK Mar. Nationwide Consumer Confidence (2301)
John J Hardy,
SAXO BANK