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Summary

  • Focus is on ECB, risk of disappointment.
  • German factory orders were up three times more than expected.
  • The US ADP has done a good job recently in anticipating the government's estimate of private sector net job creation.

There are four central bank meetings today, and the US ADP estimate steals much of the thunder from tomorrow's jobs report. Yet, the focus is squarely on the ECB meeting and Draghi's press conference. Ahead of it, the capital markets are quiet. The euro and sterling have been confined to a less than 20 tick range through the European morning. The yen and the Canadian and Australian dollars have a slightly wider range, but the net effect is the same: little changed.

Equity markets are a bit heavier, while bond markets are mixed. In Europe, the core bond markets (German, France, Netherlands and UK) are firmer, while the periphery is trading a touch heavier.

The significance of the ECB meeting has increased proportionately with the soft inflation reports and Draghi's comments, both from his prepared remarks at Jackson Hole and his impromptu comments. Most observers appear to argue that a small repo rate cut would be inconsequential, but they do not draw a link between that and increasing the odds of a successful TLTRO launch in a couple of weeks. That said, we recognize that as was the case in June, when the last rate cuts were announced, which included the negative deposit rate, the euro rallied.

We think that improving the likelihood of strong participation at the TLTRO is a key goal of today's ECB meeting. A small repo rate cut could help, as well as tweaking some of the "modalities" or rules of engagement. Draghi will also likely reinforce ideas that an ABS purchase program is highly likely, and there are other measures the ECB can take within its mandate. The new staff forecasts are likely to shave both inflation and growth.

We suspect that some of the pressure on EONIA and decline in yields, which include negative rates in Germany and Netherlands (with a French flirtation to boot), is partly a reflection of anticipation of the ECB meeting. Given the market positioning, we warn that the market is vulnerable to either disappointment with the ECB and/or a sell-the-rumor (of ECB action) and buy-the-fact type of behavior. While the $1.3170 area offers initial resistance, it probably takes a move through the $1.3220 area squeeze the late shorts.

German factory orders jumped three times more than the Bloomberg consensus expected, and the June contraction was reduced. The key takeaway is that although the German economy has lost some momentum, it is not in a recession, and the contraction in Q2 GDP exaggerated the weakness. Factory orders rose 4.6% in July, the largest rise since June 2013. The consensus was for a 1.5% increase. The June decline was reduced to 2.7% from -3.2%. This lifted the year-over-year rate to 4.9% from a revised -2.0%. Domestic orders rose 1.7%, while foreign orders jumped 6.9%, owing to a 14.6% surge of investment goods from non-eurozone countries.

The BOJ and Sweden's Riksbank meetings have already concluded, and neither generated much new information. BOJ policy remained untouched, and Governor Kuroda seems unfazed by the steep contraction in the April-June GDP. He seems to be in no hurry to alter the BOJ's course, and welcomed the recently renewed weakness in the yen. If there was a surprise, it may be Kuroda's endorsement of the next leg of the retail sales tax increase planned for 2015 that would lift it from 8% to 10%.

The Riksbank too left policy unchanged. The fact that it continues to look to raise rates toward the end of next year was seen as favorable for the krona, though it shaved its guidance on the near-term path for the repo rate. It seems more confident that the combination of the 50 bps rate cut in July and the weakness of the krona will overcome the deflationary pressures. The Riksbank's decision today was unanimous for the first time since February. The next meeting is on October 28. The next immediate focus is next week's election. The polls show a coalition led by the Social Democrats is most likely to win, and they are perceived as more favorable for a softer money policy.

The Bank of England meeting is a non-event for investors. Recall that there were two dissents at the August meeting (Weale and McCafferty). The minutes that will report the vote will be published in a couple of weeks (on the eve of the Scottish referendum). We suspect the hawks gained no fresh support, but barring a surprise "yes" vote in Scotland, another dissent is possible in October.

While the ECB meeting is the main focus, US data is also of interest. Yesterday's data unpins ideas that the US economy is accelerating. It is not so much due to the 10.5% rise in factory goods orders, of which investors already had a strong inkling after the surge in durable goods orders. In fact, if anything, the orders for non-durable goods were disappointing. Rather the Beige Book, and especially vehicle sales, fanned the optimism.

The Beige Book reported favorable economic assessments from all 12 districts without additional wage/price pressures. The vehicle sales figures were gangbusters. The 17.45 mln unit pace was a million better than July, and is the strongest monthly report since early 2006. Moreover, the increase was nearly fully captured by the so-called domestic brands (GM, Ford and Chrysler). This should have a positive knock-on effect for retail sales and industrial production.

Today's data includes the ADP estimate, which has done an excellent job in recent months anticipating the government's estimate for private sector job creation. This report and the ECB meeting will likely overshadow the July trade balance (Bloomberg consensus is for a $42.4 bln deficit, about $1 bln wider than June in nominal terms). Canada reports its trade balance at the same time. Given the BoC's emphasis on increased exports to help re-balance the economy, the Canadian dollar may be sensitive to the data.

The US ISM non-manufacturing may attract some attention, especially if Draghi's press conference is over by then (10:00 am ET, 14:00 GMT). Lastly, we note that several Fed officials speak (after Europe closes). They are unlikely to change outlooks for this month's FOMC meeting or the timing of the first hike or the terminal rate for Fed funds, which are of primary interest.

Source: ECB And More