The ECB meeting and the press conference that follows it is the main
event. However, it has had to compete with the Bank of Japan and
Riksbank meetings, as well as the further reflection of the tax reform
proposals by the Trump Administration yesterday. Also, after a
misdirection over pulling out of NAFTA entirely, the US has now signaled its
intent to renegotiate the treaty.
Global interest rates are mostly firmer, while regional indices for Asia
(MSCI Asia-Pacific Index) and Europe (Dow
Jones Stoxx 600) are snapping five- and six-day advances respectively.
The US dollar is narrowly mixed, mostly trading within yesterday’s
ranges. Of note, the Canadian dollar and the Mexican peso are among the
strongest currencies today on the US
“clarification.”
The Swedish krona is the weakest of the majors, losing almost 1% against
both the dollar and euro. The Riksbank surprised the market. It
announced an SEK15 bln increase in its
bond purchases while keeping the deposit
rate at minus 50 bp. It also seemed to push back its first hike to
mid-2018 from late this year. The Riksbank board was split 3-3, meaning
that Governor Ingves cast the deciding vote. Swedish bonds have also
reacted to the surprise, and the 10-year yield is off nearly four basis points
at 0.60%. The euro is approaching last week’s high near SEK9.67, which
corresponds to the 38.2% retracement of the euro’s decline since the US
election. The 50% retracement is closer to SEK9.75.
The Bank of Japan’s decision to keep
policy steady was decided by a 7-2 majority. The two
dissenters will be replaced by officials
who are more sympathetic to Kuroda when their terms expire in July. The
BOJ upgraded its assessment of the economy, suggesting a moderate expansion is
underway, helped by exports which are in a recovery trend. It left its
JGB purchases at JPY80 trillion, even though in the last 12 months, it has purchased a net JPY74 bln. It lifted its
GDP forecast for the fiscal year to 1.6% from 1.5% and FY18 to 1.3% from
1.1%. It introduced an FY19
forecast of 0.7%, due to anticipated retail sales tax increase and the larger capex cycle.
The BOJ still seems (unreasonably) optimistic on inflation. It
lowered its 1.5% forecast to 1.4% this year. It left the FY18 forecast
unchanged at 1.7%. The initial forecast for FY19 is
1.9%.
President Trump’s budget proposal was a single page consisting of less
than 250 words. The broad strokes were very much in line with some of
the suggestions during the campaign. It was very light on details, and this seems to be deterring
assessment of the fiscal impact. During the campaign, the Committee for
Responsible Federal Budget anticipated it would produce a shortfall of $3
trillion in five years and $7 trillion over 10-years.
The budget proposal contained only one revenue increase, and that was the eliminated of the deduction for state
taxes. This could raise as much
as $1.5 trillion for the Federal government
and would be the most felt by three states that Trump did not carry
(California, New York, and New Jersey). We suggest that it may be
most politically realistic to see the proposal as the broad initial negotiating
position, not as anything close to its final shape. If we had
to characterize the markets’ response, we’d say “unimpressed.”
The ECB is most likely to stand pat,
and Draghi is likely to reiterate the consensus judgment that while the growth
prospects have improved (based mostly on survey data), prices have yet to find
sustainable and independent (of the unorthodox monetary policy) path higher.
The preliminary estimate of April CPI will be released tomorrow. It is
expected to have risen in April after a soft March report. The Easter holiday
may have distorted these readings.
Earlier today Spain reported a larger than expected increase in April CPI
(0.9% vs. 0.7% median forecast in the
Bloomberg survey), lifting the year-over-year rate to 2.6% from 2.1%.
German states reported small month-over-month changes, but due to the base
effect, the year-over-year rates rose, and
the rise is that the preliminary national report snaps back to 2.0% from 1.5%
in March. It had reached 2.2% in February.
At the end of last week, Draghi said rates would remain at present or
lower levels. There are no
reasons not to expect him to repeat this forward guidance. If he does
not, it would be seen as a bullish sign
for the euro. He also characterized the risks to be improving but still
on the downside. There is not a compelling
reason to change this assessment. New staff forecasts are available in June, and this seems to be the window that
“sources” seemed to note who earlier this week suggested a change in
guidance was possible then.
On a technical point, the
Bundesbank purchases of short-term paper under the Eurosystem’s program may
have exacerbated a shortage, which in turn stresses the repo market.
Since the ECB’s program began, it indicated it would lend some of the
securities back to the banks. However, the conditions and costs are still
not as user-friendly as they might be, and it is possible that the ECB adjusts
the program again.
Lastly, we note that sterling is
breaking out to the upside. It is the strongest of the majors, rising
nearly 0.5% to new highs since last October. It had been consolidating by
straddling the $1.28 area since rallying on May’s surprise election call.
I reached almost $1.2920 today. While $1.30 is the next psychological
level, note that the $1.3055 area corresponds to a 38.2% retracement of the
fall from last year’s high near $1.50.