News and views
A EUR evening. The ECB cut rates 25bp, as expected, to 1.00%, but didn’t really satisfy the market’s expectations regarding quantitative easing. It said it would buy covered bonds (e.g. mortgage backed), but that they would sterilise the purchases, preventing an expansion of the money supply. The EUR60 billion involved equates to a paltry 0.6% of GDP (compared to the Fed’s 12.5%, and BOE’s 8.7%), such stimulus relatively tiny, and not supportive of USD versus EUR as the market had earlier expected, seeing EUR buying after the meeting. The BOE, on the other hand, paused as expected at 0.50%, but increased the size of their QE program by GBP50 billion, depressing the sterling. The S&P500 closed down 1.7%, despite generally better data, partly attributed to Fed Bernanke’s comment that exit strategies have been considered. Worthy of note, too, is the S&P500 forming a key daily reversal, warning of an end to this risk-rally. China’s central bank said in its quarterly report that the massive amount of QE could raise inflation and hurt bonds. US 10yr treasuries tumbled by 14bp to 3.30%, while 3mth Libor chugged 2bp lower to 0.96% as funding pressures ease.
EUR rocketed off 1.3250 support to 1.3470 on the ECB’s lack of QE, settling in the high 1.33’s. GBP weakened from 1.52 to 1.50 on the BOE’s increase in QE.
AUD ignored the S&P500 and ran up with the EUR to 0.7615, pulling back to 0.7540. Yesterday’s better employment report likely supported the currency throughout the evening.
NZD is broadly unchanged at 0.5900, after an overnight high of 0.5990. AUD/ NZD is slightly weaker at 1.2750. Yesterday’s NZ employment report, as well as Australia’s, contributed to support of the NZD.
US Q1 productivity growth 0.8% annualised, reflecting a slightly steeper 9.0% fall in hours worked compared to an 8.2% fall in non-farm output. Unit labour costs growth slowed from 5.7% to 3.3% annualised.
US initial jobless claims fell 34k to 601k last week, further evidence that the pace at which employees are being laid off has past its peak. However in the previous week continuing claims rose to a new record high of 6531k.
Fed chair Bernanke delivered a speech about banking supervision but did not touch directly on the current state of the economy or monetary policy.
The European Central Bank cut its key repo rate by a further 25bp to 1.00%; announced a decision to conduct liquidity-providing longer term refinancing operations with a maturity of one year; and announced a €60bn program of covered bond purchases (i.e. debt securities backed by cash flows from mortgages or other assets but that remain on the issuer’s balance sheet). ECB president Trichet said that “we are not at all embarking on quantitative easing” and seemed to say that these asset purchases would be sterilised but as we go to press there is still some confusion about the exact nature of the stimulus this program will provide. The technical details will be provided at the June 4 Council meeting. Nevertheless, the ECB clearly recognises the “marked weakening of economic activity in the euro area and globally”. Trichet emphasised that the Council had not decided that the repo rate could not be lowered further (his double negative!), but gave no explicit hints about any further moves as soon as June.
German factory orders jump 3.3% in Mar. This surprise rise was the first in seven months. Annual orders growth remains weak at –26.7% yr.
The Bank of England left its official rate at 0.50%, but voted to continue with its quantitative easing program, and increase it by a further £50bn to £125bn. The Bank will present its latest quarterly growth and inflation forecasts on May 13.
Outlook
The NZD almost reached 0.6000 last night, but the correlation with the S&P500 reasserted itself and dragged it back. If the technical reversal indicator in the S&P500 does prove prophetic, look for a significant pullback in NZD to 0.55.
