ECB meeting: expect removal of capital key or a move of deposit rates to increase asset availability

Yesterday’s market action

Yesterday saw the second consecutive decline in US Retail Sales with a miss on the March number by 0.2%. This followed the far larger than expected fall in last month’s release which saw sales fall to -0.5% (now revised). Ex-Auto sales also fell against expectations posting a reading of 0.4% against the expected 0.7%. We also saw the IMF downgrade the US growth forecast from 3.6% to 3.1%. This coupled with two consecutive months of underwhelming Retail Sales was enough to allow the dollar to weaken aggressively against both the Euro and the Sterling as some market participants began to price back the lift-off past the summer meetings. Although we have an FOMC meeting on the horizon it is unlikely that we will see any action in this meeting and comparatively little in terms of explanation in the text. Without a press-conference to clarify points it is unlikely that the FOMC would hint at a move in the near term. The FOMC will likely highlight the necessity for consistently improving data. The main worry for some traders is the poor NFP number seen at the beginning of April. If the next number posts a similar miss on the headline or even a slight show of underperformance below the 200k or expected figure we could see a similar result to the miss on Retail Sales yesterday. This morning saw Chinese GDP for quarter 1 fall to 7.0%, in line with the majority of expectations. Retail Sales in China also underperformed, posting 10.2% against the 10.9% expected annual figure. Equities appreciated in the hope of more Chinese stimulus initially but have since calmed. We saw Wells Fargo and JP Morgan post better than expected results for the first quarter of 2015. Whilst this did not cause a direct move in either direction it did set the tone for the afternoon’s trading session after cash open. The other main story from yesterday is that Greece are preparing contingency plans for a technical default as it seems unlikely that an agreement will be reached by the 24th of April deadline. We still await any developments in Greek reforms in the Pension and Labour space but the majority have come to the consensus that this remains an outlying possibility. Hopefully our mammalian diving reflex will enable us to hold our breath for these incoming reform packages.

Today’s View

Ahead today we have the mid-month Wednesday ECB rate decision and press conference. It will be interesting to see if the Governing Council decide to move the deposit rate or remove the Capital Key during this meeting. There seems to be little in regards to what the ECB could do this meeting so out of the blue changes to policy or purchasing structures will be unlikely. The only “risk” we see would be the reallocation of asset purchases into alternative products. As we know there is a relatively limited pool of assets the ECB see as eligible for purchasing under their QE programme. Any changes in tone towards these, perhaps even the removal or extension of the - 0.2% capital key could create unexpected volatility and therefore should be monitored. We also have Empire Manufacturing and Industrial Production due this afternoon, followed by the usual Wednesday release of the Department of Energy Crude stocks. Last night we saw API inventories print a headline of 2.5m barrels so this seems to have moved towards “normalisation.” In the event of a bigger than expected crude inventory number, traders should watch the gasoline numbers closely as this caused a lot of volatility previously. As gasoline is cheap currently, Americans are filling up for frequently, causing a draw down in stocks on a weekly basis.