Overnight Developments:
- Spain’s 10-year yield moves back to 7%, less than 1 week after “breakthrough” EU Summit.
- German industrial production climbs 1.6%, beating forecasts. It joins German factory orders data from yesterday giving a boost to prospects for biggest economy in Europe.
- In the UK, PPI Output declined 0.4%, giving more credence to BOE’s actions.
- The IMF will reduce its estimate for global growth this year on weakness in investment, jobs and manufacturing in Europe, the U.S., Brazil, India and China.
Yesterday’s Central Bank Activity:
- Yesterday, there was action by ECB (lowering benchmark interest rate and deposit rate), BOE (restarting its QE program with another 50 bn) and the PBOC (lowering its 1 year lending and borrowing rates).
- This tends to boost risk appetite, and helped commodity currencies (though mainly against EUR and GBP which were loosening monetary policy).
- But the effect has not lasted into Friday, as concern is growing that central banks are responding to recessionary forces in the 2nd half of the year.
- Also, ECB and BOE moves were expected, and some participants were hoping for more from ECB (another LTRO).
US Macro Data:
- Yesterday, US Services data showed a bigger than expected drop-off, with the index registering a 52.1 reading, vs forecasts of 53.1, and May’s 53.7.
- However, ADP rise to 176K, and the first positive beat of jobless claims in nearly 2 months has upped the “whisper” forecast to 115K from 95K.
- We are looking for clues as to whether the Fed joins other central banks in adding stimulus.
NFP & Fed:
- If NFP comes in substantially below the 115K “whisper” forecast, then bad news is good news as it means more chance that Fed will act and risk can gain.
- Weakness in manufacturing and services, along with a poor NFP will certainly not be good for US or global growth, so there may be flight to safety flows.
- However, yesterday may have given market the sense that QE3 is less likely, and may have helped undermine sentiment.
- IF NFP hits the forecast, market will keep guessing on QE, though deterioration in economy will make expectations more data dependent going forward.
- IF NFP surprises to top side, less chance of QE, though will market be disappointed by that and actually sell off risk as a result?
- Also the chance that 1 month of good data will be brushed aside as a aberration considering weakening data.
ECB Moving Towards ZIRP?
- ECB cuts rates to 0.75%, bringing interest rate to record low.
- Draghi presented a very downbeat outlook of the economy saying that the whole of Euro-zone is slowing (including Germany), while inflation remains firmly anchored.
- Therefore expectation for more rate cuts expected.
- ECB lowers its deposit rate (the amount paid to banks to hold their reserves with the ECB) to 0% from 0.25%, in an attempt to get more money into the economy.
- About 800 billion euros is currently being deposited with the ECB each day. Will banks lend this money?
Theme of This Week:
- The gain in risk assets from the EU Summit and on the back of central bank action now faces the reality of a slowing global economy, and possibility of poor outlook in the 2nd half of the year.
- If NFP stands pat on a decent NFP figure, then we may see risk aversion come back to the forefront as European periphery yields return to unsustainable levels and markets price in slower growth and demand.
Nick Nasad is a macro economist, market analyst, and educator; and one of the main contributors to FXTimes.com – provider of News, Analysis, Education, Videos, Charts, and other trading resources.
Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.
