Via Marc Chandler at Brown Brothers Harriman:
Euro Resilient Despite Draghi’s Dovish Signals
- ECB President Draghi made it clear that the market’s hawkish take on recent comments was undesirable
- Some points about the FOMC minutes are worth mentioning, as the Fed put a lot of focus on balance sheet issues
- Reserve Bank of India surprised markets and hiked the reverse repo rate 25 bp
- Israel and Peru expected to keep policy unchanged
The dollar is mixed against the majors in choppy trading. Nokkie and Kiwi are outperforming, while Stockie and Aussie are underperforming. EM currencies are mostly weaker. ZAR and MXN are outperforming, while KRW and TWD are underperforming. MSCI Asia Pacific was down 0.8%, with the Nikkei falling 1.4%. MSCI EM is down 0.6%, with China markets rising 0.3%. Euro Stoxx 600 is down 0.4% near midday, while S&P futures are pointing to a lower open. The 10-year UST yield is up 2 bp at 2.35%. Commodity prices are mixed, with oil up 0.1%, copper down 0.3%, and gold down 0.2%.
ECB President Draghi made it clear that the market’s hawkish take on recent comments was undesirable. Specifically, he said ““We have not yet seen sufficient evidence to materially alter our assessment of the inflation outlook -– which remains conditional on a very substantial degree of monetary accommodation. Hence a reassessment of the current monetary policy stance is not warranted at this stage.”
ECB’s Praet also made similar statements supporting Draghi’s stance. Indeed, the two seemed to push back against Weidmann’s comments earlier implying normalization of monetary policy was warranted. The ECB will publish the account of its last policy meeting later today. There is clearly a debate raging at the ECB, but we believe Draghi is in the driver’s seat. We expect a similar pushback from Draghi at the next ECB meeting April 27.
Germany reported February factory orders. Due to a quirk, the 3.4% m/m gain was weaker than expected, while the y/y rate of 4.6% was stronger than expected. January readings were revised upward.
Needless to say, the euro has been choppy today. It fell to near $1.0630 before bouncing to trade flat on the day currently around $1.0665. The March 15 low near $1.06 is the next near-term target. However, a break of the $1.05 area is needed to set up a test of the January low near $1.0340.
Some points about the FOMC minutes are worth mentioning, as the Fed put a lot of focus on balance sheet issues. The Fed seems to favor shrinking the balance sheet this year. It seems to favor tapering reinvestment rather than stopping abruptly. The Fed also seems to favor letting maturing bonds roll off, and they will not sell any outright. It hopes to alert markets “well in advance” of when it starts reducing the balance sheet, presumably to prevent any panicky market reaction.
Many issues still need to be discussed at upcoming meetings. For instance, some FOMC members want the start of balance sheet reduction to be triggered when the fed funds rate hits a specific level, while others want to make the choice data dependent. The FOMC also is split on whether to target a time limit for balance sheet reduction or to target a specific balance sheet size.
Bottom line: The Fed wants to act very, very cautiously on the balance sheet issue while at the same time maintaining maximum operational flexibility. Yet the discussion of balance sheet reduction is another sign of growing confidence in the Fed’s efforts to normalize policy.
During the North American session, the US reports weekly mortgage applications and jobless claims. Both are minor, with markets looking ahead to tomorrow’s jobs report. Williams is the only Fed speaker today, and he is not a voter this year.
Caixin reported China services and composite PMI readings for March. They both softened to 52.2 and 52.1, respectively. This comes after Caixin reported March manufacturing PMI last Friday at 51.2 vs. 51.7 expected, while official manufacturing PMI was reported last week at 51.8 vs. 51.7 expected. Despite the divergence in these two series, markets appear comfortable with the mainland economic outlook.
Reserve Bank of India surprised markets and hiked the reverse repo rate 25 bp. No change was expected. It had pretty much signaled an end to the easing cycle at its last meeting in February, but tightening was not expected until late this year. Since the last meeting, price pressures have risen and the economy has picked up. While the benchmark repo rate was kept steady at 6.25%, it’s clear that full-scale tightening will be seen this year.
Israeli central bank is expected to keep rates steady. CPI rose 0.4% y/y in February, and is moving closer to the 1-3% target range. While there is no need for any further stimulus, we do not expect the tightening cycle to begin until 2018. However, the central bank is likely to continue buying USD to prevent excessive ILS strength.
Peru’s central bank is expected to keep rates steady at 4.25%. With inflation picking up to 3.25% in February, we think caution is warranted. Once inflation moves into the 1-3% target range, we think the central bank consider starting the easing cycle near mid-year.