Markets were disappointed by the ECB. European equities closed 3.0% lower, while the S&P500 is currently down 1.1%. While there were notable steps towards proper quantitative easing (future bond purchases may be unsterilised and see the ECB relinquish its seniority status), hopes for immediate action were dashed. Moreover, the possibility of future bond purchases was conditional on Eurozone countries doing more to resolve the crisis. Overall, there was probably enough to reduce the risk of a Eurogeddon but not enough to satisfy buyers of risky assets. The CRB commodities index is down 1.6%, Brent oil -0.2% (WTI oil -2.1%), copper -2.3%, and gold -0.7%. US 10yr treasury yields reversed sharply on the ECB comments from 1.57% to 1.44%. Peripheral EZ bonds were damaged, Spain’s 10yr yield up 43bp to 7.17%, Italy’s up 40bp.
The US dollar index (DXY) is higher. EUR initially spiked from 1.2255 to 1.2405 on the ECB statement but Draghi’s comments afterwards dampened the market mood and it fell to 1.2134. USD/JPY fell well before the ECB from 78.50 to 78.20 and consolidated around there. AUD firmed in the run-up to the ECB, spiking from 1.0520 to 1.0580 immediately and then slumping to 1.0489 during the press conference. NZD similarly spiked to 0.8172 and then slumped to 0.8076. AUD/NZD was heavy throughout, falling from 1.2960 to 1.2915.
US factory goods orders down 0.5% in June. Non-durables were down 2.0%, offsetting a 1.3% rise in durables (revised down from 1.6%).
US initial jobless claims rose 8k to 365k, but the recent distortion due to seasonal adjustment difficulties related to summer auto plant shutdowns has not yet passed according to the Labor Dept; the spokesman added that next week’s figures should private a clearer guide to the jobs market. In related news, corporate layoff announcements were down 44.5% yr, but these figures can also be volatile in the summer months. In other US news, the little-watched NY ISM rose from 49.7 to 55.2 in July.
The ECB left rates unchanged and warned that “a further intensification of financial market tensions has the potential to affect the balance of risks for both growth and inflation on the downside”. The press statement sounded promising: the Governing Council “may undertake outright open market operations of a size adequate to reach its objective.” and that it “ may consider undertaking further non-standard monetary policy measures according to what is required to repair monetary policy transmission.”
But in the Q&A, it became apparent that these outright open market ops would only involve short-term debt of sovereigns with excessive risk premia who had applied to the EFSF/ESM rescue fund and accepted strict conditions. Draghi was being necessarily vague about some of the detail such as sterilisation and its creditor seniority status because legal and other issues have yet to be decided. However he reiterated that the measures will be adequate to ensure the effective transmission of monetary policy. Markets were disappointed with the lack of immediate action and lack of detail (and only the barest hint of a big bazooka). That said, Draghi has delivered in the past and he implied he would again in a matter of weeks.
Euroland PPI decelerated to 1.8% yr in June, its slowest since early 2010.
Bank of England on hold at 0.5% and no change to the £375bn asset purchase program target. On the data front, the PMI construction rose from 48.2 to 50.6 in July, just a partial recovery of its 6.2 pts drop in June.
AUD and NZD Outlook: The ECB disappointment should weigh on the currencies during the days ahead, although there was enough in the statement and comments to prevent a worst-case-scenario selloff. Tonight’s US payrolls report is the next major event to watch.
NZD/USD 1 day: We favour a break below 0.8080, targeting 0.8030.
NZD/USD 1 month: 0.7800.
NZ 2yr swap yield 1 day: Opening today 6bp lower at 2.76%.
NZ 2yr swap yield 1 month: Towards 2.50% on the ECB disappointment.
AUD/USD 1 day: Remaining below 1.0500 towards 1.0425.
AUD/USD 1 month: 1.0100.