ECB signals renewed QE coming soon. US durable goods orders rise in June. Eyes on US Q2 GDP. AUD weaker after dovish RBA speech. More Brexit tensions

Overnight the ECB held off adopting any fresh stimulus measures, but set the scene for some action at its next meeting in September. 

The lack of immediate action saw slightly higher European bond yields, while stronger US durable goods data helped drive US Treasuries yields slightly higher. 

In currency markets, the NZD and AUD have weakened against a backdrop of weaker equity markets and a dovish RBA speech.

The ECB’s policy message was largely in line with market expectations, even if some had hoped that some further easing in policy would begin immediately. The ECB said that it expects to keep its key interest rate at its current level of minus 0.4% or lower through the first half of 2020 – the addition of the words “or lower” providing a clear signal that it is planning a rate cut in September. 

Furthermore, the Bank also said its staff would examine “potential new net asset purchases” in an effort to push up persistently low inflation. President Draghi said that the economic outlook “is getting worse and worse,” especially in manufacturing, but he also said that the risk of recession is low. He favours the addition of a “tiering system” to soften the impact of negative interest rates, but Bloomberg reports that a significant number of the Governing Council are unconvinced of the merits of that and instead favour changing the terms of the latest long-term loan programme.

The money market prices in a 10bps cut to the ECB’s deposit rate in September, to take it down to minus 0.50%. European bond yields were slightly higher across the board, reflecting some disappointment that the ECB didn’t offer any immediate stimulus, but only up 1-2bps for the 10-year rate for most countries. Earlier in the European session, Germany’s IFO gauge of business expectations was weaker than expected, falling to its lowest level since the GFC in 2009. The data followed the weaker PMI manufacturing the day before and suggests that Germany’s economy is continuing to lose momentum and probably contracted in Q2. After the weak data, Germany’s 10-year rate fell to a record low of minus 0.42% before ending the session “only” up 2bps for the day at minus 0.36%, after digesting the ECB’s message.

EUR showed some volatility, trading between a two-year low of 1.1102 and as high as 1.1188, before settling unchanged for the day around 1.1145.

Durable goods orders data in the US were stronger than expected, including a lift for the core measure, going against the grain of weaker business confidence surveys and other activity indicators. While this was pleasing to see, advanced estimates on trade and inventories suggested that these components will act as a bigger-than-expected drag on Q2 GDP which is released tonight, placing downside risk to the consensus annualised 1.8% estimate – already on track for the weakest quarterly growth in over two years. US Treasury yields are up about 3bps across the curve, seeing the 10-year rate at 2.07%, pushing higher after the durable goods data were released.

The AUD weakened after RBA Governor Lowe’s speech had a dovish tilt yesterday afternoon. It has pushed further down overnight to below 0.6950, against a backdrop of weaker global equity markets. Governor Lowe said that “…if demand growth is not sufficient, the board is prepared to provide additional support by easing monetary policy further” and that “it is reasonable to expect an extended period of low interest rates”. Furthermore, “it is highly unlikely that we will be contemplating higher interest rates until we are confident that inflation will return to around the mid-point of the target”. The market moved to price in more easing – with now almost another full 25bps cut priced by October and two cuts by mid-next year – while the 10-year government rate fell by 7bps to a record low of 1.23%

This dynamic helped push NZ swap rates down across the curve to record lows, with the 2-year rate down 3bps to 1.28% and the 10-year rate down 4bps to 1.70%.

Alongside a weaker AUD and lower rates, the NZD weakened, heading down from around 0.6700 to below 0.6660, slightly underperforming the soft AUD, seeing the NZD/AUD cross nudge down to 0.9585. The higher global rates backdrop hasn’t done the yen any favours either, with USD/JPY up 0.5% to 108.70.

GBP is on the soft side as well, falling 0.3% to 1.2450. That said, GBP is holding up remarkably well considering the increased uncertainty about the outlook with new PM Johnson. In his first address to Parliament, Boris Johnson talked a tough game, saying that the terms of the current EU Withdrawal Agreement were unacceptable and he demanded the complete removal of the so-called Irish backstop as the key objective in future Brexit negotiations with the EU. With this having about zero chance of the EU accepting such a demand (and was immediately rejected by EU Chief Negotiator Barnier), the risk has increased of no agreement before the deadline of 31 October. This follows Johnson’s earlier comments on the steps of 10 Downing Street of “no ifs or buts” Britain would leave the EU in 99 days’ time and loading up his new Cabinet with hardline Brexiteers. Parliament is expected to push back on any hard Brexit so it seems that the scene is being set for a delay to Brexit to pave the way for an early general election.

As noted earlier, US GDP data are released tonight, with downside risk to the consensus estimate surveyed prior to the trade and inventory data released overnight and about from that the calendar is fairly bare.