ECB delivered a big package

Jens Nærvig Pedersen Danske Bank A/S

Market movers today

Markets will continue to digest the repercussion of yesterday's eventful ECB meeting. Also focus remains on any headlines about a possible interim trade deal between the US and China.

EU Finance ministers will meet in Helsinki today. Discussions on the "euro area budgetary instrument for convergence and competitiveness" as well as policy priorities from the new Italian finance minister will both be on the agenda.

In the US retail sales figures for August are due out. Last month, the retail sales control group came out much stronger than we expected, indicating strong consumption growth. In light of the recession in the manufacturing sector, we intend to keep an eye on whether private consumption growth can keep up the pace. While a negative surprise is long overdue given the volatility of the time series, fundamentals still look strong and we expect an increase of 0.4% m/m.

In Sweden we get revisions of second quarter GDP today.

Selected market news

The ECB cut the deposit rate by 10bp to -50bp, leaving the MRO and MLF unchanged, while also linking it to the inflation outlook. In addition, the ECB restarted QE by EUR20bn/month with an open end, which was a strong commitment, but a very vocal call from Draghi indicated a need for fiscal policies to take the stage now. Given the much clouded environment and need to gauge the market impact of the tiered deposit system on money market rates, we do not expect the ECB to change policy rates in our horizon at the current juncture. However, if further monetary easing is needed, it would come via a rate cut and not further QE.

The short-end of the EUR money market curve suffered markedly on the publication of the details of the tiered deposit system, which potentially could mitigate part of the effect of the rate cut, while the longer end of the yield curve is broadly unchanged on the day. EUR/USD initially sold off on the open-ended QE announcement, but bounced back after details of the tiered deposit system was announced.

Following the rate cut from ECB, Danmarks Nationalbank announced a 10bp cut in its key policy rate, the rate of interest on certificates of deposit, to minus 0.75%. It left the current account rate and the lending rate unchanged at 0.00% and 0.05%, respectively. Danmarks Nationalbank also kept banks' current account limit unchanged.

In the midst of the ECB meeting, rumours surfaced that US had discussed offering China an interim trade deal that would delay and roll back some tariffs in return for concessions on the issue of intellectual property rights and purchases of agricultural goods. The White House later denied. OPEC+ announced that it will put more pressure on members not complying with output cuts in response to concerns of a growing supply surplus in the oil market. Finally, US Treasury Secretary Mnuchin dismissed the rumour from earlier in the week that US mulls an easing of sanctions on Iran.

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Jens Nærvig Pedersen

Danske Bank A/S

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