It's all about the central banks this week.
Events last week were dominated by Thursday’s speech by the ECB President, Mario Draghi, in which he stated that the ECB stands ready to do whatever is necessary to preserve the Euro. The comments led to a risk rally on Thursday and Friday, pushing the EUR up around 2 big figures against the Dollar. President Draghi cited the impairment of monetary policy in the periphery resulting from widening sovereign spreads, as falling within the remit of the ECB. In our view, the comments are a signal that the ECB is prepared to use its balance sheet to support the EUR, however the precise timing, nature and pre-conditions of such an intervention were not specified. On the back of President Draghi’s comments, markets are full of anticipation for the upcoming week, which is filled with central bank meetings – including the ECB, FOMC, and BoE – business surveys, and activity data.
ECB: President Draghi’s comments substantially raised expectations for Thursday’s (August 2) ECB meeting. In the latest European Views, Huw Pill has outlined the possible policy measures. While there is significant expectation for a reactivation of the SMP, in our view the ECB is unlikely to move in this direction unilaterally: before the ECB provides direct support to the sovereign markets, in particular that of Spain, we believe it is necessary for the Spanish government to request support from the EFSF and accept the implied conditionality. An alternative to direct government bond purchases is the announcement of measures on Thursday to permit Euro area national central banks to purchase private-sector assets, including unsecured bank debt and corporate debt, to implement ‘credit easing’. In the absence of a formal request for EFSF assistance from Spain (thus precipitating ECB intervention), we think the purchase of private assets to be the most likely course of action.
As to the effect of potential ECB policy action, as Themos Fiotakis wrote in last Wednesday's Global Markets Daily, the impact of on EUR can vary depending on the effect on short-term interest rates. Conventional rate cuts lead to lower short-term rates, resulting in EUR weakness, while a decisive intervention into sovereign bond markets would act to unwind the risk premium in peripheral bonds and bring core rates closer to normal levels, leading to EUR strength. Considering the forceful comments by President Draghi, and the limitations of conventional monetary policy acknowledged in his speech, we see potential for EUR to climb higher on the back of policy announcements. Given the raised expectations, the absence of decisive action on Thursday would likely be poorly received by markets.
FOMC: The last input for the FOMC was the US GDP at 1.5%qoq annualised, which although well below trend growth was in line with expectations. We believe that the below-par economic environment warrants further easing, and that next week is likely to see an extension of the rate guidance to keep interest rates ‘exceptionally low’ until mid-2015, rather than the current late-2014. Our base case remains that further outright asset purchases are likely towards the end of 2012 / start of 2013, however acknowledge the possibility of earlier easing should the economic indicators continue to deteriorate.
BoE: We expect no change in stance at the BoE meeting this week. However, on the back of the very weak GDP print of -0.7%qoq annualised released last week, in our view further policy loosening is justified when the current QE program ends in November. This is likely to come in the form of additional easing (GBP 25bn), as well as a 25bp rate cut to 0.25%, both coming at the November meeting, in our view.
Business surveys and Activity data
Last week the Chinese Flash HSBC Manufacturing PMI was better than expected, up from 48.2 to 49.5, while the Euro area manufacturing numbers continued to disappoint. The global PMIs on the coming Wednesday (manufacturing) and Friday (services) will be a useful indicator of the health of global industrial activity. Among the activity data, US Non-farm Payrolls is the most important release this week, with consensus expecting an improvement from 80,000 to 100,000. Korean and Japanese IP are also of interest, as is Korean export growth, which along with the PMIs is a key input to our Global Leading Indicator (GLI). July’s advanced reading of the GLI showed a tentative stabilisation in momentum, albeit at low levels. We will be watching next week’s survey and activity data for further signs that the deterioration in global industrial momentum is slowing.
Monday 30 July
- Japan IP (mom): Consensus expects a rebound from last month’s -3.4% to 1.5%.
- Also interesting: Spain GDP, Sweden GDP.
Tuesday 31 July
- India CB Meeting: We expect the Reserve Bank of India to keep the policy rate on hold.
- Euro Area CPI: Consensus expects 2.5%yoy after 2.4%yoy in June.
- Canada GDP (mom): Consensus expects 0.2%mom after 0.3%mom previously.
- US PCE Price Index: Consensus expects 1.5%yoy.
- US S&P Case Shiller Home Price Index: Consensus expects 1.5% mom up from 1.3% last month.
- US Consumer Confidence: Consensus expects a marginal decline to 61.5 from 62.0 for July.
- Also interesting: South Korean IP, Germany Retail Sales, US Personal Income.
Wednesday 1 August
- FOMC Meeting
- Russia Monetary Policy Meeting (1-10th August)
- Global Manufacturing PMIs / US ISM Survey
- Korea Export Growth / Trade Balance (prelim): Consensus expects a fall to -3.6% in Korean exports growth vs 1.1% last month.
- Also interesting: Indonesia CPI, United States ADP Employment
Thursday 2 August
- ECB Meeting
- BoE MPC Meeting
- Czech Republic Monetary Policy Meeting: We expect no change to the policy rate of 0.5%.
- Spanish PM Rajoy to meet Italian PM Monti
- Also Interesting: Switzerland Manufacturing PMI.
Friday 3 August
- US Non-Farm Payrolls: Consensus expects an increase to 100K from 80K in June.
- Global Services PMI / US ISM Non-Manufacturing Survey
- US Unemployment Rate: Consensus expects no change from 8.2% for July.
- US Factory Orders: Consensus expects a decline to 0.2% from 0.7% previously.
- Also interesting: Russia CPI, Turkey CPI.