The ECB’s sobering economic outlook triggered further weakness in global equity markets, lower global bond rates and a lower euro. Other key currency movements have been modest, with the NZD and AUD close to where they were yesterday morning.
With not much else going on, all eyes were on the ECB overnight and the central bank’s announcement triggered a market reaction. The ECB significantly cut its growth and inflation forecasts and shifted out the timing of any policy tightening measures. Rate hike guidance was pushed out by three months, with rates now on hold “at least through the end of this year” (previously “at least through the summer”). Furthermore, the Bank announced plans for a fresh batch of cheap long-term (2-year) loans for banks to be launched in September. A previous batch of long-term loans matures in June 2020, so from June this year they will have less than 1-year to mature. By promising a new batch of loans, the ECB wards off what would have been a tightening in liquidity conditions later in the year. ECB President Mario Draghi said that although the likelihood of a recession is “very low” the risks to the euro area growth outlook are still tilted to the downside.
The market expected these policy measures although some thought that the ECB might hold off announcing them until a later meeting. European equities fell (Stoxx 600 down 0.4%, banks down 3.3% in the wider index), EUR is down 0.7% after earlier reaching a 21-month low just above 1.12, and European bonds rallied (Germany 10-year rate down 6bps to 0.06%). The market didn’t like the negative economic outlook portrayed by the Bank. Draghi admitted that policy options for the ECB were limited and that some economic forces (external factors such as trade protectionism and Brexit) were outside of its control.
The ECB’s actions spilled over into other markets, dragging down US equities, with the S&P500 on track for a fourth consecutive daily decline (currently down 0.6%). Lower European rates helped drag down US rates, with the 10-year Treasury rate down 5bps to 2.64%. The weaker euro has seen some spillover into other European currencies such as SEK and NOK but of the key majors we’re interested in, only GBP has been affected, down 0.3% to 1.3135 after earlier going sub-1.31. We see limited downside risk for EUR given how much bad news is already priced into the currency. NZD/EUR is up 0.7% to 0.6025, and faces some technical resistance near 0.61.
Bloomberg reported that European and UK officials are pessimistic about the chances of a breakthrough in Brexit talks, with Britain accusing the bloc of intransigence and European negotiators worried that whatever they offer won’t be enough to get Parliament behind PM May’s deal. It seems that the most likely scenario from here is that May’s deal is defeated next week (12 March) and then Parliament takes control of the process, which will likely include a vote to reject “no-deal” and then a vote to extend the exit day to allow negotiations to continue. However, it is still a moving feast and as we go to press, Bloomberg has reported that the EU is said to make a new offer to the UK on the Irish backstop issue, bolstering the review system that aims to track progress towards getting rid of the backstop. The EU awaits a response from the UK.
NZD trades this morning at 0.6765, close to where it was this time yesterday. The risk-off move post the ECB has seen the gains in the NZD made yesterday afternoon in the local trading session unwind. The AUD has shown a similar trading pattern and again finds some support near the 0.7020 mark. The negative reaction to softer retail sales figure didn’t last long, with either AUD selling pressure exhausted for now or the market deciding that the very strong trade surplus was a mitigating factor. NZD/AUD struggled to push through resistance and met some selling pressure just above 0.9640. The cross currently sits at 0.9625.
NZ longer term bond and swap rates fell 3-4bps, dragged down by lower US rates in the previous session and we should see further falls today.
This morning, manufacturing and building data will help firm up Q4 GDP estimates for NZ, for which data will be released 21 March. We currently sit around 0.6-0.7% q/q, which would be a good result considering the poor run of global growth for that quarter. China trade data are likely to be distorted by Chinese New Year effects, so we wouldn’t pay too much attention, while anything other than a recovery in Germany factory orders data tonight would be a huge disappointment. The US employment report will be the key focus for the market, which is expected to show robust employment growth, a tick down in the unemployment rates and average hourly earnings ticking back up to 3.3% y/y.
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