Draghi Delivers - Will It Be Enough?

The ECB deliver a sweeping stimulus package, but pass the baton to fiscal policy to turnaround the bloc’s economy; with the US consumer in focus today.

Previous Day's Market Highlights

European Central Bank (ECB) President Draghi unleashed his monetary policy bazooka once again on Thursday, using his penultimate meeting to unveil a significant stimulus package in an attempt to turnaround the bloc's economic fortunes and re-anchor inflation expectations closer to the ECB's 2% target. Policymakers announced the following:

  • A 10bps cut to the deposit rate, bringing rates to a fresh record-low of -0.50%.
  • A tiering mechanism, designed to exempt a portion of bank reserves from sub-zero rates, to ensure smooth monetary policy transmission.
  • Altered forward guidance, indicating that rates will remain at their present, or lower, levels until inflation begins to 'robustly converge' towards the 2% target.
  • The restart of quantitative easing, an open-ended programme where the ECB will purchase 20bln EUR per month of eurozone bonds until 'shortly before' rates are increased.
  • More generous terms for TLTRO III (cheap, long-term bank funding), including the loans being priced at the deposit rate, with the maturity extended to 3 years

Despite the significant stimulus package outlined above, it is clear that the ECB's monetary policy toolkit is almost empty, with President Draghi himself emphasising the importance of fiscal stimulus in view of increasing downside economic risks. As if to emphasise these risks, the ECB's economic projections were revised lower, with GDP now expected at 1.1% this year, and 1.2% in 2020. Inflation forecasts were also downwardly revised, implying lower rates for longer, with HICP expected at 1.2% this year, and just 1.0% next. It is clear that, to prevent a deeper economic slowdown, fiscal policy will have to do the heavy lifting, with monetary policy no longer able to be the only game in town.

For the euro, the policy decision was met with an immediate bout of selling resulting in the common currency shedding 0.8%. However, the year-to-date low of $1.0925 held as firm support, with the market rebounding strongly from this level for the euro to close 0.5% higher on the day. The euro's resurgence is likely due to two factors. Firstly, self-imposed issuer limits mean that seemingly open-ended QE programme will run out of headroom in approximately 9-12 months, resulting in less stimulus than originally implied. Secondly; hawkish dissent, opposing the restart of asset purchases, from a number of national central banks (including France, Germany and the Netherlands) implies a split on the Governing Council, potentially making further policy easing a more difficult task.

Elsewhere, the dollar lost ground, slipping by 0.3% against a basket of peers, despite hotter than expected CPI figures giving the Fed a conundrum. Headline CPI increased by 1.7% YoY in August, however the less-volatile core measure, which excludes food and energy, increased at a faster than expected 2.4% YoY, the fastest pace in over a year. This puts the FOMC in a quandary, with the market pricing an aggressive path of policy easing, the economy showing signs of slowing, but inflation beginning to quicken. While a 25bps cut next week remains likely, further loosening may be more doubtful.

Meanwhile, the pound meandered, with no data releases or major Brexit-linked headlines to drive sterling in isolation. The pound ended the day 0.1% higher against the dollar, recovering from a brief dip below $1.23. Against a stronger euro, the pound shed 0.4%. Risk-sensitive currencies were more volatile, with conflicting trade headlines resulting in confusing trading conditions. Both the Aussie and Kiwi dollars ended the day 0.2% lower, having erased earlier gains after reports that President Trump was considering an interim US-China trade deal were denied.

Away from FX, European equities closed with modest gains, with the pan-continental Stoxx 600 closing 0.15% higher. US equity markets also rallied, the benchmark S&P 500 adding 0.3% to close within touching distance of its all-time high. Finally, oil prices lost ground after the OPEC+ meeting failed to yield further output cuts. Global benchmark Brent settled 0.7% lower, while US WTI crude lost 1.2%

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1155 1.1254 1.0880 3.32%
GBP/USD 1.2350 1.2385 1.1958 3.45%
EUR/USD 1.1070 1.1164 1.0926 2.13%
GBP/AUD 1.7970 1.8336 1.7792 2.97%
GBP/NZD 1.9270 1.9413 1.8826 3.02%
GBP/CAD 1.6330 1.6357 1.5956 2.45%

Today's Market Highlights

The US consumer comes sharply into focus today, with both retail sales and consumer sentiment figures due. With consumer spending remaining the growth engine of the US economy, markets will be paying close attention to today's releases, with any dip in either spending or confidence likely to be a sign of slower economic growth in the coming quarters. Firstly, retail sales are expected to have increased for a 6th straight month in August, with the headline measure expected to increase at 0.2% MoM. Excluding automobiles, sales are set to tick up by 0.1% MoM, while the less-volatile control group measure is expected to increase by 0.3% MoM. While such increases would represent a moderation from July's sales surge, any decrease can likely be put down to summer seasonality. Secondly, this afternoon's preliminary consumer sentiment figures from the University of Michigan are expected to rebound after recording the biggest 1-month decline in 7 years in August. September's index is expected at 90.9, though the impact of increasing US-China trade tariffs may act as a drag on sentiment.
 
Elsewhere, no major economic releases are due from any other G10 economy, a factor likely to result in rangebound trading conditions as market participants continue to digest yesterday's ECB stimulus package. Euro traders will also be on alert for any ECB 'sources' reports, which may give greater clarity on the policy decision. Meanwhile, the pound's direction of travel will continue to depend on political developments.
 
Looking ahead to next week, monetary policy will remain in focus, with 5 central bank decisions due over a period of less than 24 hours. Wednesday will likely see the Federal Reserve announce a 2nd 25bps rate cut this year, bringing rates to a range of 1.75% - 2.00%. On Thursday, the Bank of Japan (BoJ) may strike a more dovish bias, with policymakers reportedly becoming increasingly concerned by more pervasive global risks. In contrast, the Norges Bank are set to remain on track for a rate hike in December. Also on Thursday, both the Swiss National Bank (SNB) and Bank of England (BoE) will likely keep rates on hold.
 
Economic data will take something of a back seat next week, though CPI inflation reports from Canada, Japan, the UK and eurozone will be eyed for signs of softness. Markets will also pay attention to retail sales figures from the UK and Canada, while also parsing the monthly German ZEW sentiment surveys for any further signs of softness.

Today's Economic Calendar

Time Currency Release Consensus Previous
1:30pm USD Retail Sales (MoM - Aug) 0.2% 0.7%
1:30pm USD Retail Sales ex Autos (MoM - Aug) 0.1% 1.0%
1:30pm USD Retail Sales Control Group 0.3% 1.0%
3:00pm USD Prelim. University of Michigan Consumer Seniment Index (Sep) 90.9 89.8