Draghi’s Day
A market looking for a new quasi-coordinated blast of policy stimulus got its first dose of disappointment on Wednesday as the Fed chose to sit tight for now. There were no policy innovations at all, and not even a change in the “late 2014” guidance. US dollar bulls reasserted themselves, but were held back somewhat by the Fed’s admission that “economic activity decelerated somewhat over the first half of this year” and “the Commission will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed”. Indeed, the overall US macro picture remains sufficiently murky to keep the door open for further Fed easing in September. There was some softening on the outlook for the economy, pointing to ‘significant downside risks’, though at this stage it appears the risks were not significant enough to warrant policy adjustments. US data was also mixed yesterday with July ADP up +163k, but the ISM manufacturing figure remained in contraction territory at 49.8. As such the focus is now on the ECB’s decision today where expectations have been elevated by Draghi’s commentary last week on prospective policy measures. Even though the market itself is divided over the exact meaning of his commentary and what is actually being sought, Draghi himself will understand that the perception of ‘failure to deliver’ could yet be damaging and lift periphery yields back up to uncomfortable levels. Our European economics team expects no ECB rate cut, but rather a formal endorsement of the reactivation of the SMP – without any guidance on size, target bond yield/spread, pace, or even the timing of the programme. Judging from recent comments by German officials, even this is far from a done deal. In addition to the ECB, the BoE is also up but we don’t expect any major changes in policy – the launch of the ECTR and FLS schemes will be given time to feed through to the real economy before the BoE decides on its next step. Overnight EURUSD traded 1.2219-1.2256 and USDJPY 78.37-78.53.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank