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BoE surprises as it expands its QE programs and expresses caution

Thu, Aug 6 2009, 14:00 GMT
by John Hardy

Saxo Bank  |  View company's profile

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Market looking for positive US employment report tomorrow - is it already priced in?

MAJOR HEADLINES – PREVIOUS SESSION

• New Zealand Q2 Unemployment Rate rose to 6.0% vs. 5.7% expected and 5.0% in Q1

• New Zealand Q2 Employment Change fell -0.4% QoQ vs. -0.5% expected and -1.3% in Q1

• Australia Jul. Unemployment Rate was steady at 5.8% vs. a rise to 6.0% expected

• Australia Jul. Employment Change was up 32.2k vs. -18k expected and -23k in Jun.

• Switzerland Jul. SECO Consumer Climate fell to -42 as expected and vs. -38 in Jun.

• Germany Jun. Factory Orders rose 4.5% vs. 0.6% expected, and were down -25.3% YoY vs. -26.5% expected

• UK Bank of England kept rates unchanged at 0.50% as expected

• EuroZone ECB kept rates unchanged at 1.00% as expected

• Canada Jun. Building Permits rose 1.0% vs. -3.0% expected

• US Weekly Initial Jobless Claims out at 550k vs. 580k expected and 588k the previous week

• US Weekly Continuing Claims out at 6310k vs. 6250k expected and 6241k the previous week

THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

• US Jul. ICSC Chain Store Sales (1500)

• Australia AiG Performance of Construction Index (2330)

• Australia RBA Quarterly Monetary Policy Statement (0130)

Market Comments:

The Bank of England stunned the market with a very dovish performance today that does not dovetail very well with the signs of higher inflation and better than expected numbers lately from the UK economy. The BoE left rates unchanged at 0.50%, but decided to expand its QE program with another 50 billion pound extension to the asset purchase plan. While the bank did suggest that confidence has picked up and financial market strains are easing, it fretted over the fact that the world is still in a recession, that spare capacity has increased and pay is weak, and that fixing bank balance sheets is still going to constrain lending going forward. It also appeared dovish on future inflation due to the slack in the economy. The dovish rhetoric knocked GBP for sharp losses across the board, but GBP has not yet followed up today on the initial move lower, which makes sense in light of equity averages pushing the rally close to new highs ahead of the US open. This performance from the BoE should put the brakes on any further rally in the GBP against the broader market, though it may take a change in risk sentiment before we see the full force of any turn around.

The ECB also kept rates unchanged as unanimously expected and his prepared statement at the press conference failed to provide anything that could budge the Euro out of its trading range for the day. Rhetoric like "the overall mood is a little better than before" and "the ECB is very prudent and cautious" and "uncertainty remains very high" are hardly the stuff of shifting rate expectations. He also mentioned that the ECB "did not discuss whether ECB rates are at their lowest level" and suggested that the economy would remain weak this year. Again, the rabid German hawks - this time Ottmar Issing, the ECB's former chief economist - have been out saying that the big risk remains removing the stimulus immediately to avoid skyrocketing long interest rates.

Trichet echoed this sentiment in softer tones in today's remarks by suggesting that further stimulus is not necessary and that government should prepare exit strategies. No new QE-like measures were mentioned or discussed, with the ECB only noting very strong demand at its 12-month refinancing tenders and that these showed a remarkable impact (like stabilizing the entire EuroZone's financial house of cards, perhaps...?).

The markets got another sentiment boost this morning as the weekly US jobless claims number dipped again, to the lowest level in four weeks and the second lowest level since early January. Interestingly, the continuing claims number ticked up and was higher than expected - which is beginning to ruin the picture of a downtrend developing in that indicator, and suggesting more of a stabilization. Still, since the 1960's, once the jobless data turns, it turns for a long period of time, usually at least a few years. Only in the early 1980's recession did the turn lower in claims prove temporary and result in another surge to an even higher peak. Regardless, the initial claims numbers need to work down to well below 400k per week for us to talk about any kind of job recovery, an it will be tough to find that development until we see signs of end demand picking up and capacity utilization closing the output gap as well. As long as claims remain above that 400k area, the US unemployment rate will continue to tick higher.

Australia and New Zealand were both out with employment reports overnight, the Australian one (in the headlines at least) offering the first strong data point this week from Australia and the New Zealand report showing unemployment dipping to a new 9-year low and far worse than expected. World bond markets initially rallied heavily on the BoE QE expansion announcement, but that brief rally has already been wiped away as of this writing. If equities continue higher and bonds lower, AUDUSD could just try for one more attempt through the top, though we are looking for a possible pivot point ahead of the key 0.8500/20 resistance area. Tonight, the RBA is to release its quarterly monetary policy statement. Also worth noting about the supposedly strong Australian jobs report, full time employment dropped -16k while part time employment rose 48k.

The way in which the markets have recovered from a very bad US ISM Non-manufacturing report yesterday (one of the better surveys as it is fairly forward looking and represents the largest portion of the largest economy in the world) suggests that the risk bulls are still very much in charge at the moment until an equal and opposite force decides to erect a roadblock. Again we are very concerned about the extremes in sentiment and positioning and look for a pivot point in this action within the coming week to three weeks as is seems this kind of action is not sustainable for much longer. Let's see how the market survives another sentiment test with tomorrow's US employment report, which many think is shaping up to be the best in some time (despite very interesting news item today that TrimTabs thinks the BLS is under-reporting unemployment. Considering the long history of US official governements statistics being used politically, we would not all be surprised if this is the case). After that, we have next week's FOMC meeting to look forward to.

Published on  Thu, Aug 6 2009, 14:04 GMT

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