Monday 26 September 2016

Daily Market Update: Euro remains under pressure as leaked details of ECB policy options emerge

Simon Barry

Published 26/11/2015 | 10:17

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Yesterday brought the traditional pre‐Thanksgiving data dump from the US as the statisticians scurried to clear their desks ahead of the holiday weekend which begins today.

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The compression of three days of newsflow into one meant there was a raft of data covering several important areas of the economy including consumer and business spending, the labour market as well as inflation.

The personal income and spending report revealed a mild disappointment in October spending which rose by only 0.1% m/m vs. 0.2% expected while there was also a small downward revision to spending growth in September. This means there’s less go‐forward momentum in spending early in the fourth quarter, in turn pulling down expectations for Q4 spending and GDP a bit. But we’re not troubled by this development for two reasons. First, it looks as if some of the weakness was linked to soft utilities spending within the services category, but some of that is likely to be temporary as it is related to unseasonably mild temperatures requiring fewer home heating days. Second, income trends continue to look very solid, with real wages and salaries growing by 4.5‐5% y/y at present. Such firm trends in a key driver and determinant of spending don’t support a negative outlook on the US consumer at present. Moreover, yesterday’s jobless claims figures (which showed a larger‐than‐expected fall in initial claims) highlight that improvement in the labour market is ongoing, thus underpinning the key support to spending that the jobs market provides. Turning to business spending, the durable goods report revealed an encouraging increase in orders in October. The 1.3%m/m increase in core capital goods orders last month suggests that pipeline capex spending by businesses on equipment and software is on track for a second consecutive quarterly rise, following a run of three quarterly declines to Q2 of this year. Finally, on the prices side, the core PCE index was weaker than expected in showing an unchanged reading on the month. This left the annual rate of core inflation on this measure running at an unchanged 1.3% in the year to October rather than ticking up to 1.4% as had been anticipated by Wall Street analysts. But 1.3% is broadly in line with the Fed’s latest forecast for this measure to be at 1.3‐ 1.4% in Q4 on average, especially when one considers that undemanding base effects are very likely to produce an uptick in November / December. Indeed, while the totality of yesterday’s news was a bit of a mixed bag, our overall takeaway is that it is not likely to shake the Fed’s conviction that interest rate lift‐off will likely occur in December.

Meanwhile on this side of the Atlantic, a Reuters story contained leaked details about some of the policy easing options under consideration at the ECB which apparently include a two‐tier structure on the ECB’s deposit facility, as well as potentially even buying packages of loans at risk of non‐payment (though that latter option is not seen as a runner at present). While there is still much uncertainty about what will ultimately get delivered next week, the emergence of such reports containing reference to specific possibilities has served to keep the euro under pressure on the exchanges. Eur/USD touched as low as $1.0570 while Eur/Stg again flirted with 70p at one point, though both pairs are opening a little higher than these intra‐day lows from yesterday. While we continue to think that the path of least resistance for the euro (especially vs. the dollar) is lower in the coming sessions, we continue to have a nagging doubt about the ability of Draghi to exceed market expectations which have in recent days and weeks become quite elevated. That $1.0460 level we have been highlighting for some time remains a likely and plausible target in coming sessions, but as we get closer to that level (and to next Thursday’s rendezvous with Draghi) we would not be surprised to see the emergence of greater two‐way risk in the euro’s price action, with potential for a correction higher in the event that Draghi & Co disappoint the market.

Yesterday’s Autumn Statement in the UK revealed that Chancellor of the Exchequer George Osborne’s medium term fiscal plan remains largely unchanged, but fiscal consolidation will be phased in at slower pace than had previously been signalled. The Chancellor also made a significant U‐turn on proposed tax credit cuts and declared that he will lean heavier on increasing taxes (relative to his June position) to achieve the desired correction.

Turning to the day ahead, the ECB announce the Eurozone M3 money supply for October. The report will also contain key information regarding the supply of credit in the real economy. Expectations are for the money supply to grow at a healthy 4.9% y/y after 4.9% in September. A stronger than expected number would capture the attention of more hawkish members of the Governing Council, but it is unlikely that Draghi’s plans for further monetary stimulus next week will be scuppered.

In Ireland, earnings and labour costs are reported for Q3. Average weekly earnings grew by 1.4% y/y in the first half of the year; we expect another moderate rise, especially given the further improvements in the labour market reported in the QNHS last week.

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