Euro Remains Firm Despite Dubious Tapering Story

The euro is consolidating yesterday’s recovery. 
It is trading in about a quarter cent range above $1.12.  The focus is not
on today’s service and composite PMI, which in aggregate was in line with the
flash readings.  The service PMI ticked up to 52.2 from 52.1 in the flash, but
the composite reading was steady at 52.6.  Recall that 52.6 matches the
lowest level since January 2015. 

While the markets can be an incredibly
efficient discounting mechanism, it sometimes is also an echo chamber.
began off as a Bloomberg report indicated that there was an agreement at the
ECB that when it decided to end its asset
purchases, it would gradually taper back
rather than come to a fast stop, by the end of the day, it had become the as
MarketWatch put it “…ECB could end quantitative easing efforts sooner
than it had planned.”  

Today the echo reverberates back to Bloomberg, where one report explains
the weakness in equities saying that “Bloomberg reported that an informal
consensus was building in the ECB to rein in quantitative easing…”

Moreover, the report leaves out the denial by the ECB spokesperson. 

By itself, the Bloomberg story
itself told us little new.
 ECB President Draghi had already indicated
that there would not be an abrupt end to the purchases
when that day arrives.  The original Bloomberg story explicitly noted
that before tapering, that the current asset program could be extended.
 The Bloomberg story
essentially confirmed that there was a consensus behind Draghi’s remark and that the quantum of 10 bln euros means that it will take most of a year to
wind down the purchases.

At the last press conference, Draghi was specifically
asked about issues about extending the purchases beyond March 2017, or the
decision-making process, as the capital
key, was not discussed.
may be more cynical, but there is good reason to accept Draghi at face value.
 The decision on asset purchases need not be
until December.  If this is true, then there is no point in
talking about it as the full set of information is not available.  

Not only has the euro remained firm, but bond yields are extended yesterday’s losses. 
Benchmark 10-year yields are 2-5 bp higher.  The backing up of yields is
also corresponding to a widening of premiums over German bunds.   Over the
past five sessions, Italy has replaced Portugal for the biggest increase in
yields.  The 16.5 bp increase compares with 10.5 in Germany, 11 in Spain
and 10 in Portugal.  

Equity markets in Europe are lower, with the Dow Jones Stoxx 600 snapping
a six-day advance.
    Here Italy is bucking the trend, with
the FTSE Milan Index up 0.5% near midday.  Although Deutsche Bank shares
are flat, Italian bank shares are up over
2% to break a two-day 1.7% fall.   In
Asia, Japanese shares moved higher (~0.5%), but most other bourses were heavier,
and the MSCI Asia-Pacific Index was flat.

Japan’s service PMI fell for the second consecutive month to stand at
.  It is the second month below the 50 boom/bust, and it is the lowest reading since April 2014.  The
composite was also below 50 for the second consecutive month.  After
February, there has been only one month that the service PMI was above 50 (July

The dollar marginally extended yesterday’s gains against the yen, which
we note, violated a downtrend line going back to late-May.
greenback is toying with JPY103.00.  The next immediate target we
suggested was the mid-September high near JPY103.35.    The high
from earlier in September was a little above JPY104.30.  

Ideas that the May government’s priorities will produce “hard”
Brexit continued to weigh on sterling. 
Sterling was pushed below
$1.27 in late-Asian activity, but it has recovered back toward session highs (almost $1.2750) with the help of another
firm PMI reading.  The service PMI was 52.6 in September, down slightly
from the 52.9 August report, which it will be
was a dramatic recovery from the 47.4 July reading.  The
median forecast was for a larger pullback.  

The BOE meets in early-November.  The recent string of data has
made a follow-up rate cut less
likely.  However, in any event, given the signals from the BOE, negative
rates or even zero base rate was not being considered.  This means that a rate cut would not have been
25 bp but probably something closer to 10-15 bp.   The failure to
ease further in November is clearly not a game changer.  Surveys by a
couple of the large accounting/consulting firms found a high number of
companies consider moving some operations out of the UK.   

The Swedish krona is the strongest of the major currencies with a 0.4%
gain against the dollar and 0.2% against the euro. 
These gains come despite the dramatic plunge in
August industrial production and orders.  Industrial output collapsed
4.1%.  It is the fifth drop in six months
and the largest since July 2015.  Industrial orders fell 9.8% in August,
offsetting the 1.1% rise in June and 5.1% gain in July.

The North American session features the ADP employment estimate, the
August trade balance, and the PMI/ISM services report
and factory orders
.  The ADP report is the most important. 
Investors will also pay close attention to the DOE energy report. 
Yesterday’s industry (API) estimate showed inventories falling 7.6 mln

Despite what some partisans may suggest, the fact of the matter is that
how to deal with ‘too big to fail” banks remains not only controversial
but cuts across party lines.
 When US Representative Waters suggests
breaking up the large banks, or Senator Warren comes down hard on banks that
have betrayed the public’s trust as well as the law, many investors cringed.

However, Minneapolis Federal Reserve President Kashkari, a Republican who
ran TARP under President Bush, has advocated the breakup of large banks.
also believes that Dodd-Frank did not go far enough.   Kashkari laid out
his views in his first speech as Fed President eight months ago.  Kashkari
speaks later today.

Meanwhile, Chicago Fed President Evans, a noted dove, said yesterday that
he envisions one hike this year, probably in December. 
implication of this is that it means that he was likely not one of the three
officials whose dots that did not see a hike this year.    Given
Dudley’s cautiousness expressed earlier this week, the third dot may have been
his.  If so, and the other two being Brainard and Tarullo, it may explain
Yellen’s hesitancy last month.   

We also note that Evans, like Mester, did
not rule out a November hike.  
As we have argued, there simply is
not a precedent for a rate hike a week
before national elections.  To break such a
, there must be a great sense of urgency, which does not seem
present.  We suspect that such comments are meant to underscore the idea
that all meeting are live.  We are skeptical.  


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