Central banks mostly as expected, but ECB seems more pessimistic than most


MAJOR HEADLINES – PREVIOUS SESSION

  • UK BOE leaves rate unchanged

  • EU ECB leaves rates unchanged

  • CA Apr. Building Permits out at -5.4% m/m vs. -8.1% expected and revised +24.4% prior

  • US Q1 Non-farm Productivity out at +1.6% vs. +1.2% expected and +0.8% prior

  • US Q1 Unit Labour Costs out at +3.0% vs. +2.9% expected and +3.3% prior

  • US Initial Jobless Claims out at 621k vs. 620k expected and revised 625k prior

  • US Continuing Claims out at 6,735k vs. 6,855k expected and revised 6,750k prior

  • CA Bank of Canada leaves rates unchanged

  • CA May Ivey PMI out at 48.4 vs. 54.0 expected and 53.7 prior

  • AU AiG Performance of Construction Index out at 46.9 vs. 36.5 prior


THEMES TO WATCH – UPCOMING SESSION

  • UK PPI Input/Output Prices (0830)

  • CA Unemployment Rate (1100)

  • US Non-farm payrolls (1230)

  • US Unemployment Rate (1230)

Market Comment:

The three central banks in the spotlight performed according to plan yesterday. The BOE, ECB and bank of Canada all left rates unchanged at their respective levels (not surprising considering the current low levels, but there were minor differences when it came to references to quantitative easing policies.

The Bank of England kept the total size of asset purchases under the Asset Purchase Scheme (APS) at GBP 125 bln. Note that the BOE has spent GBP75 bln already since the inception of the scheme and outlined that asset purchases would take another 2 months while the scale of the program would be kept under review.

ECB chief Trichet confirmed that the Bank would buy EUR60 bln worth of covered bonds in both the primary and secondary markets across the Euro area. The scheme would start in July and end in June 2010, and the ECB would quickly reverse these measures once the economy picked up. In the Q&A session he noted that the ECB would expect “automatic sterilization” of the bonds it was buying and would look at sterilization measures “if needed”, though there were no imeediate plans for such a move. He also noted that most Euro-zone nations would exceed the 3% budget deficit limit in 2009 and 2010. ECB Staff forecasts for the Euro-zone economy showed some deep downward revisions compared to March, with 2009 predictions in a -5.1% to -4.1% band, giving an average 4.6% contraction. Growth for 2010 was also revised lower to range between -1.0% and +0.4% compared to +0.6% and +1.4% in the March report. It seems ECB staffers are not so convinced that “green shoots” will not be evident in the Euro-zone in the near-term. However, note that earlier this morning Luxembourg PM Juncker was reported as saying the European economy was no longer in freefall and is slowly moving upwards, signaled by a recent series of positive economic indicators.

The Bank of Canada reiterated its intent to keep its o/n target rate at 0.25% until Q2 2010 but made no mention of any intentions to introduce quantitative easing measures. The central bank was however more vocal on its currency, expressing caution about the CAD’s “unprecedentedly rapid rise” and how it may fully offset improvements in commodity prices, confidence and financial conditions. USDCAD remained steady after these comments with markets largely taking them with a pinch of salt. On the economy, the BOC commented that information/data received since the last Monetary Policy Report was broadly consistent with its medium term outlook for both output and inflation in Canada.

Other central bank meetings resulted in a 10bp trimming of rates by the Danish central bank to 1.55% while the Russian central bank cut rates by 50bp to 11.5%.

The data slate is relatively barren today, but what is on tap could prove to be the major event of the week. US non-farm payrolls are due at 1230GMT and widely expected to show some improvement. Market consensus is for a loss of 520k jobs, lower than last month’s 539k and with some forecasts coming in at under 500k. The private ADP employment report on Wednesday did show an improvement to -532k from -545k previously (upwardly revised) and yesterday’s initial jobless claims were broadly in line with expectations at 621k, though the week in question included the Memorial day holiday. More significantly, the continuing claims data showed a reduction in total numbers for the first time this year. Despite the expected improvement, unemployment is expected to edge up to 9.2% from 8.9%.