ECB Eurozone outlook not so bubbly
April 5, 2019
The European Central Bank Meeting Accounts that came out yesterday were dovish as can be, yet, as expectations for the Eurozone economy are currently near all-time lows, it didn’t move the needle much on euro crosses. The minutes did reveal policymakers argued a return to long term growth averages may not be obvious, and how the low growth regime may be more persistent than previously anticipated. Also, it was discussed how ultra-low interest rates might damage banks, which could lead to measures protecting the profitability of the banks. Overstimulating the banks to write out credit does run the risks of blowing bubbles in the economy, distort optimal capital allocation and have unintended redistributive side effects. At the moment the ECB doesn’t seem to be overly focused on this, although history may not judge them so kindly as the inadvertent consequences of these policies prove to do more harm than good.
A leak in the House of Commons gave the country a long-awaited respite from the Brexit news flows. Sterling eventually traded on something other than Brexit and UK data yesterday as it tracked the broad dollar move. Cross-party talks will continue today but if they fail to find a majority stance, Attorney General Geoffrey Cox warned that an Article 50 extension would be “longer than just a few weeks or months”. All eyes will be fixed on the pre-summit letter from Theresa May to the Donald Tusk, the European Council President, which was released this morning. May asked Tusk for an extension until June 30, keeping the UK in the EU for MEP elections, but suggested if a deal can be ratified prior to that date the extension should be terminated early. The letter states that the UK will prepare for European elections, which will likely rile up the Eurosceptic members of the Tory party. Any response from Tusk will likely be a market mover.
The US dollar breathed some life into what was a boring G10 session yesterday after Jobless Claims data showed the number of US citizens claiming unemployment-related benefits for the first time reduced considerably last week. The dollar went bid against the whole of the G10 currency board, with only the Australian Dollar closing flat against the greenback. This morning the dollar awaits the infamous non-farm payroll release after last month showed the US economy added only 20,000 jobs – far less than the level needed to maintain the current level of economic slack. The state of the US labour market, which gauges the healthiness of the US economy, will likely dictate global FX today with growth concerns still in abundance.
A slide in WTI crude prices from Wednesday’s highs combined with a well-bid US dollar, in general, put the loonie on the back foot yesterday. This was despite a solid print for the Ivey Purchasing Managers Index, which beat expectations to rise to 54.3 in March. This is consistent with the view that the Canadian economy enjoyed a relatively swift bounce after a poor end to 2018. The labour market has been holding up well recently and added 55,900 jobs in February – meaning that today’s labour market data at 13:30 GMT will be closely watched for signs of continued strength, and wage acceleration.