Yesterday’s FOMC minutes leave us with an overall feeling of dovishness. Quite a bit of deliberation regarding the phrase considerable time, but perhaps more interesting Fed officials were quite explicit in their concern regarding weak growth in the Eurozone, China and Japan, in their concern on geopolitical risks, and in some concern on too strong a dollar may hamper plans to hike soon and fast.
Are we in the sequel of the currency wars? It is clear that the ideal EURUSD for the Fed to plow ahead and realize the dot-chart is likely significantly higher than the ideal EURUSD for the ECB regarding in particular inflation expectations. This is likely a theme that will play out over quite a long time.
US stocks increased modestly on the FOMC-dovishness whereas it was another poor showing by EuroStoxx50 which dropped 1% and now lies almost 7% lower than mid-September.
More key figures from Germany today
The unfortunate stream of poor German data can easily continue today where we see current account and trading balance data for August this morning. Consensus is braced for a setback relative to the prior readings, but the market seems fragile for more downside surprise. The numbers are out in a little bit, at 8:00 CET.
Yesterday’s auction in German Oct2019 bonds resulted in a new record low rate at 14bps, but was not filled completely with €3.944bn issued vs. €4bn targeted.
ECB: Systematically optimistic
ECB vice president Constancio was yesterday out with a retro-Draghi performance both in terms of prospective sizes in the ABSPP and CBPP3 programs and the impact on the ECB balance-sheet. It’s nothing new for the ECB to remain systematically optimistic in their operations, but given that Draghi a week ago downplayed especially the balance-sheet targets, this seems like a reminder that the balance sheet may well hit early 2012 levels without QE. We remain of the conviction that that will be very difficult indeed.
Not much market reaction to the above, as bunds during the day tested the highs from late August with the 10Y yield dipping below 0.9% again. Draghi’s speech today in Washington could potentially have a larger impact (as did his recent most one in Jackson Hole in August), but we expect it to be a continuation of the relatively hawkish stance of last Thursdays ECB-meeting.
Constancio’s comments are in line with reported entrepreneurship from e.g. Santander and their plans to capitalize on the ABS-focus by selling securities based on Finish car loans. On the other hand, it doesn’t align that well with the apparent dissent on the risk willingness of the ECB regarding ABS-purchases uttered by Nowotny, Weidman and to some extent Noyer as well.
EUR inflation: Firmly anchored at global lows?
The best thing to say is that the falls seem to be fading. 5y5y seems to be anchored around 1.90%, which apart from being bad news to technical analysts who have argued for a lack of support as soon as the old 2010-bottom of 1.915% was reached, at least offers a flicker of hope for the ECB in their quest to ride the existing facilities over new ones.
Inflation expectations have not been aided one bit by the recent 1½ figure increase in the EURUSD and a continued trajectory towards 1.20 would surely befit the ECB very well. Simplistically, there’s two ways to get there, through US-strength or through further ECB dovishness, and clearly the bias from Draghi is currently to stay clear of the latter.
Supply
30Y US bonds re-opens tonight with $13bn targeted.
Nordea