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ECB Hawk Signals Again That Global Monetary Accommodation Has To Go

Published 10/10/2017, 09:14 am
Updated 06/07/2021, 05:05 pm

Originally published by AxiTrader

Market Summary

With the US mostly out for the Columbus Day holiday, markets were fairly quiet overnight.

While US rate markets were closed, stocks were open posting mild falls for the big three indexes. At the close the Dow Jones Industrial Average was at 22,761 down 0.06%, the Nasdaq 100 dipped 0.1% - breaking its nine day run of wins – at 6058, and the S&P 500 dipped 0.18% to 2544.

In Europe the FTSE 100 dipped 0.2% but the DAX, powered by some solid gains in German factory activity rose about 20 points to close at a new record high of 12976. But it’s the US and falls in iron ore local traders on the SPI looked to as they subtracted 15 points from yesterday afternoon’s close.

On currency markets it has been a fairly quiet 24 hours with the US dollar initially under pressure in Europe from the German data and comments from the usually hawkish ECB governing council member Sabine Lautenschlaeger. But save for a half a percent rally in the pound after the ONS revised UK labour costs up to 2.4% from 1.6% putting more pressure on the BoE to hike rates and the kiwi's drift toward targets under 70 cents with a 0.44% fall to 0.7061 it was fairly quiet in currency markets.

The Aussie dollar lost ground after the disappointing Chinese data yesterday and iron ore fall and it’s off 0.21% at 0.7753.

On other markets WTI is up half a percent but Brent is mostly unmoved after comments from OPEC Secretary General that the rebalance in the oil market is happening. Gold has got some of its lustre back, up 0.65% - $8 – to $1283. Copper is becalmed at $3.01.

Today is NAB business survey day. The most important of monthly indicators for me because of the broad scope of the economy it looks at.

And the big news for a behavioural economics and finance guy like me this morning is that Richard Thaler has been awarded the economics version of the Nobel Prize. While Daniel Kahneman and Amos Tversky effectively inventoried behavioural economics and finance, to me it’s Thaler who helped spread the word and drove the acceptance that we mere mortals, us humans, are at the centre of the economy and thus should be in economics.

Here's What I Picked Up (with a little more detail and a few charts)

International

  • Data and comments out of Europe overnight support the two notions that could roil markets over the next six months. The first is that with German factory orders surging 2.6% in August – the highest in 6 years – the time for central bank emergency measures is past. The second is that comments from ECB governing council member – and noted uber Hawk – Sabine Lautenschlaeger highlight that central bankers know this accommodation needs to be removed. “From my point of view, it is important that we really move towards the exit – step by step, but steadily and in a clear direction” she said.
  • Now of course she knows the ECB script and also said “As of today, it is clear which sequence the exit will follow. Bond purchases will come to an end, while interest rates will remain low, well past the horizon of net asset purchases”. But for me the comments that highlights the potential roiling of markets is that she said – like most of the Fed speakers we’ve heard from recently - that because rates are low, because borrowing costs are cheap, it is only a matter of time before inflation rises back to the ECB target so the bank needs to be planning this exit.
  • Why is all of this important? Because of bond rates, especially long bonds. German 10's, heck 10’s in most jurisdictions, are still historically very low. As 2018 looms as the first truly synchronised year of global growth in a decade these rates are vulnerable if inflation pops higher. Indeed they are vulnerable if inflation stays relatively quiet and central bankers act as though inflation has risen. Something to watch in the months ahead.
  • Also in Europe overnight investor morale hit a 10 year high Sentix reported.
  • And the Catalonian leader is under pressure to step back from an independence declaration. That’s from EU governments in Germany and France, from the marchers who took to the streets Sunday to decry indepence, and from the Catalonian headquartered companies who are shifting their head offices out of the region and into what we might term “Spain proper”.
  • Mmm, China. I’m not a cynic about Chinese data in an overall sense. While, with the benefit of hindsight, it is now clear that economic growth data has been massaged and smoothed over many years the reality is that since it joined the WTO in 2001 China has been on an amazing run of solid growth. But it is the future that matters to markets. So as we ready for next week’s 19th National Party Congress, when President Xi is expected to cement his place among the Pantheon of Chinese leaders along with Mao and Deng, traders wonder if that also means a greater focus on reform and crackdown on excesses in the economy starting points are important.
  • So yesterday’s surprisingly weak Caixin Services and Composite PMI’s signal that the Chinese expansion is weakening is worth noting. The Services PMI printed 50.6 in September down 2.1 and the lowest level sicne December 2015 while the Composite PMI was at 51.2 – the lowest since June this year. The official stats on the other hand were printing multi--year highs.
  • Business Insider’s David Scutt explained the difference between the Official ebullience in the PMI’s released earlier this month and the much weaker expansion as difference in companies surveyed – official SOE’s who might gild the lily (my words), and Caixin a broader range with more small and medium businesses. Either way I’ve spent some time on this today because what comes out the other side of the Conference next week will shape views about where Chinese growth and markets will head. And of course that will have knock on effects in Australia and for the AUD/USD.

Chart
Caixin China PMI (Source: IHS MArkit)

  • And on the outlook for growth in China a new report from the Kansas City fed, co-authored by a PBOC researcher says “our analysis indicates that the momentum of Chinese growth is likely to slow in the near term”. Some of us thought that Chinese growth was never going to be allowed to slow before the 19th Congress – I saw that as a given. But the report says also “strength in policy-related variables has been waning, creating additional downside risks to near-term growth”.
  • Keep an eye on the Kurds folks, if for no other reason than the impact the withdrawal of its 500,000 bpd might have on that market if the Turkish President follows through on his threat to turn on the tap. I raise this again today because now that IS seems to be out of the picture, the Kurds and Iraqi forces are facing off and with Iran and Turkey also backing Baghdad we could have a messy situation building in the region.

Australia

  • A half a percent rally is nothing to sneeze at. That’s certainly the case when it follows a 1% rally such as we saw in the S&P/ASX 200 index Friday. But after two days of solid gains all the local market has to show for it is an index that – with a close at 5739 up 28.5 points – is in reality simply in the middle of its range since June.

Chart
ASX200 Daily (Source:Investing.com)

  • Yesterday was a good day. And while all sectors save for basic materials and energy were higher, along with 145 of the 200 stocks in the index, it still remains the case that questions about the relevance of the Australian market in global investors portfolio’s are still being asked. Certainly it was in my interviews in Singapore yesterday.
  • It’s a long term question, and one I feel is heavily dependent on the outlook for the domestic economy, property, and the banks more than anything else. To that end the jury is still out, debating the outlook for the economy in the wake of last week’s shock fall in retail sales, and as worries about the ability of households to continue consuming gain currency. Indeed yesterday JP Morgan’s local head of economics highlighted this fact and said the chances of an RBA rate cut are now higher than one of a rate hike. Today’s NAB business survey will b important in influencing my own view on both the outlook for rates and the economy.
  • Back to the price action and overnight SPI traders have knocked off 15 points in overnight trade. We’ll see how China trades, how metals fair, and how the NAB survey prints.

Forex

  • I won’t fill out the space with empty words this morning. Forex markets were in aggregate reasonably quiet last night. But that aggregate which left he US dollar in index terms largely unchanged at 93.71 or the euro up a little at 1.1739 belied a few individual moves and a period of weakness for the dollar after the German data and ECB comments before it made back most of that ground.
  • Indeed we ended up with a few specific moves in the main G10 forex markets I watch. GBP/USD was the highlight. The huge revision higher in UK labour unit costs by the ONS overnight from 1.6% yoy to 2.4% has put more pressure on the Bank of England to hike rates which helped Sterling even as the UK government says the Brexit Ball is in the EU’s court. GBP/USD would have to rally up through 1.32 to turn the tide though at the moment.
  • USD/JPY is still looking very toppy. Last night’s low of 112.32 was around the low last week so if this 112.25/30 region gives way we may see a break lower.

Chart

  • The kiwi remains unfashionable and I retain an outlook which looks for a full round turn and retracement back to the start of the rally around 0.6970.

Chart

  • Looking at the Aussie as well and it’s clear that traders have taken a fresh look at the outlook for it, the economy, and RBA rates since retail sales last week. A weak NAB business survey would really hurt the Aussie today in a manner that a continuation of the solid results we’ve seen from conditions, trading, profitability, and employment over recent months. Traders will be watching last month's fall in confidence to see how that flows and what it suggests about the outlook. I’ll personally be looking to see if NAB chief economist Alan Oster finds anything in the data to either reaffirm, or change, his call for rate rises in 2018.

Commodities

  • A few weeks back, perhaps longer, I noted that the Saudis were trying to change the conversation around the oil market from production to exports. We saw more of that overnight as the Saudis announced that even though they had demand for 7.71 million barrels a day in November they will only be shipping 7.15 million. That’s a big deal and would be expected to push oil higher except for two things. That’s a lift from last month’s 6.7 million bpd, and we know from the published data that last week US exports hit a ne high of 1.98 million bpd. So this morning we have WTI up 0.55% at $49.56 while Brent is up 0.13% at $55.69.
  • It’s hard to see because of the Fibo’s on this chart but Brent held well above my slow moving average and the 50% retracement of the recent uptrend. $54.78 is the key level it has to hold to avoid a deeper fall.

Chart

  • Gold might have turned a short term corner with last night’s $8 rally back above $1280 an ounce. The chart speaks for itself and my system generated a buy order for today’s trade. It doesn’t mean I will get set of course. Gold would have to trade through last nights high.

Chart

  • Copper is still holding above $3.

Have a great day's trading.

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