Sive Morten
Special Consultant to the FPA
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Fundamentals
This week has passed under the sign of ECB meeting. In our previous weekly report we've estimated that EU economy is far from good condition and stands at the edge of recession. EU GDP data was able to show 0.2% growth, but Germany MoM GDP has shown -0.1% recession and overall situation lets us to suggest that this is not short-term situation. Fathom consulting in its recent report tells that difficult situation in Germany will last at least for two more quarters.
Except ECB, we also have got some US data. If PPI and CPI are lagging indicators and make minor impact on the markets - Retail sales is quite different tune. As I said in video, Retail sales takes 70% of national GDP and it uses in different statistic regression models for GDP data prediction. R. sales releases monthly and investors always stand careful to them.
U.S. retail sales increased more than expected in August, pointing to solid consumer spending that should continue to support a moderate pace of economic growth.
Retail sales rose 0.4% last month, lifted by spending on motor vehicles, building materials, healthcare and hobbies. Data for August was revised slightly up to show retail sales increasing 0.8% instead of 0.7% as previously reported.
Economists polled by Reuters had forecast retail sales would gain 0.2% in August. Compared to August last year, retail sales advanced 4.1%. Retail sales have increased for six straight months, the longest such stretch since June 2017.
But with the Trump administration this month slapping a 15% tariff on Chinese consumer goods such as televisions, apparel, bed linens, smart watches and footwear, there are concerns retail sales could pull back. Economists and retail groups expect businesses will pass on the duties to consumers, thereby raising prices for the targeted goods.
“It is too early to assess the impact of the new tariffs that took effect at the beginning of this month, but they do present downside risks to household spending,” said Jack Kleinhenz, chief economist for the National Retail Federation in Washington.
Households’ worries about the new round of tariffs were also underscored by a small rise in consumer sentiment early this month. The University of Michigan said its survey of consumers found that concerns about the impact of tariffs on the economy rose in early September.
Excluding automobiles, gasoline, building materials and food services, retail sales climbed 0.3% last month after increasing by a slightly downwardly revised 0.9% in July. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. They were previously reported to have jumped 1.0% in July.
Here is what I've said above - Consumer spending, which accounts for more than two-thirds of the economy, increased at a 4.7% annualized rate in the second quarter, the most in 4-1/2 years.
Economists expect consumer spending will slow to just below a 4.0% rate in the third quarter, which would be more than enough to keep the economy growing at a steady pace, rather than tipping into recession as signaled by financial markets.
“The trend in consumer spending growth still looks very solid,” said Michael Feroli, an economist at JPMorgan in New York. “Consumers remain the locomotive of the economy.”
Strong consumer spending is encouraging retailers to boost inventory. A second report from the Commerce Department on Friday showed business inventories increased 0.4% in July after being unchanged in June. Stocks at retailers rebounded 0.8%, the most in six months, after falling 0.2% in June.
The inventory increase bodes well for GDP growth this quarter. The Atlanta Fed is forecasting the economy to grow at a 1.8% rate in the third quarter. The economy grew at a 2.0% rate in the April-June quarter, down from the first quarter’s brisk 3.1% pace.
Financial markets have fully priced in a rate cut at the Fed’s Sept. 17-18 policy meeting. Most economists expect additional monetary policy easing in October and December. While underlying consumer prices have accelerated in the past three months, inflation is likely to remain benign.
In a fourth report on Friday, the Labor Department said import prices dropped 0.5% last month amid declines in the cost of petroleum products and food. In the 12 months through August, import prices decreased 2.0% after dropping 1.9% in July.
Import prices have now declined for five straight months on an annual basis.
Low inflation, the lowest unemployment rate in nearly half a century and about $1.27 trillion in personal savings are underpinning consumer spending. Even as the economy has been slowing, layoffs have remained low.
Last month, auto sales accelerated 1.8% after edging up 0.1% in July. Sales at building material and gardening equipment stores jumped 1.4%, the most since January.
Online and mail-order retail sales increased 1.6% after shooting up 1.7% in July. Receipts at health and personal care stores rose 0.7%, mirroring a jump in healthcare inflation in August. Americans also spent more at hobby, musical instrument and book stores, boosting sales 0.9%.
The report from the Commerce Department on Friday could further allay financial market concerns of a recession, which have been fueled by a year-long trade war between the United States and China as well as slowing global growth.
Still, the Federal Reserve is expected to cut interest rates again next Wednesday to blunt some of the hit from the trade tensions on the longest economic expansion in history.
Fed Chair Jerome Powell said last week he was not forecasting or expecting a recession, but reiterated the U.S. central bank would continue to act “as appropriate” to keep the expansion, now in its 11th year, on track. The Fed lowered borrowing costs in July for the first time since 2008.
“The winds of recession aren’t coming closer to shore if the consumer continues to buy their hearts out,” said Chris Rupkey, chief economist at MUFG. “Fed officials are unlikely to cut rates too much deeper as they seek to get out in front of the risks the economy faces acting early instead of being too late.”
The recent Retail Sales data is important for us, guys, because it indicates condition of US economy. With coming September rate cut, economy will get additional support to stay o course, money will become even more cheaper in US.
This in turn, gives us assurance that the core of our long-term strategy stands intact - solid disbalance on US and EU economy conditions. We have healthy consumption, low unemployment, moderate inflation on one side and coming QE, economy at the edge or recession on the other side, with no reserve for rate cut from ECB. This balance should hold, which let us to keep our long term bearish view on EUR/USD.
CFTC data also shows, at least on EUR that investors keep shorts intact, despite recent ECB statement:
Source: cftc.gov
Charting by Investing.com
In wider view, speculators reduced their bullish bets on the U.S. dollar in the latest week, according to calculations by Reuters and Commodity Futures Trading Commission data released on Friday. The value of the dollar's net long position, derived from net positions of International Monetary Market speculators in the yen, euro, British pound, Swiss franc and Canadian and Australian dollars, was $13.33 billion in the week to Sept. 10. That compares with a net long position of $14.24 billion in the previous period.
In a wider measure of dollar positioning that includes net contracts on the Brazilian real and Russian ruble,
the U.S. dollar posted a net short position valued at $12.58 billion, down from $13.11 billion a week earlier.
Early this week, the dollar drifted lower as investor appetite for higher risk currencies found support on a report of German stimulus plans, diminishing chances of a no-deal Brexit and hopes of a breakthrough in the U.S.-China trade war.
Since then, the dollar has fallen further as the euro has gained following the European Central Bank's decision on Thursday to exempt euro zone banks from a penalty charge, which analysts say will reduce the currency impact of new stimulus. The ECB on Thursday cut its deposit rate to a record low -0.5% from -0.4% and said it will restart bond purchases of 20 billion euros a month from November. The purchases will run for
as long as necessary and end shortly before it starts raising the key ECB interest rates.
It is not simple story around recent ECB statement, but let's take a look first, what ECB promises to the markets.
The euro skidded below $1.10 on Thursday after the European Central Bank cut interest rates and unexpectedly relaunched a quantitative easing programme as well to boost the region’s economy.
Investors had expected a rate cut at Thursday’s meeting but there was some uncertainty as to whether policymakers would restart a QE programme after some ECB members expressed doubt in recent weeks about the need to relaunch asset purchases.
Stephen Gallo, European Head of FX Strategy at BMO Capital Markets, said that if the ECB prepared the market for significant rate cuts ahead, “that would be quite dovish, quite bearish” for the euro.
A few minutes later EUR turns to rally after the European Central Bank launched new stimulus but failed to live up to some dovish market expectations. It also said it expects bond purchases to run for as long as necessary and end shortly before it starts raising the key ECB interest rates.
“We got a little bit of everything, but when all was said and done I think markets were expecting the bazooka to come out, and we definitely didn’t get the bazooka,” said Win Thin, global head of currency strategy at Brown Brothers Harriman in New York.
But in fact, I suggest that this news was a decisive for EUR rally on Thursday - "The euro was also boosted after the ECB said that euro zone banks will be exempted from paying a penalty charge on idle cash worth six times their mandatory reserves."
“Cutting the deposit rate and introducing ‘tiering’ at the same time was likely to have a mixed impact on the EUR and that seems to be one of the reasons why the weakness in EURUSD on Thursday reversed abruptly,” Stephen Gallo, European head of FX strategy at BMO Capital Markets said in a report on Friday.
By exempting banks from the penalty charge, the ECB aims to minimize stress in financial institutions that have been harmed by years of low rates.
Tiering aims to protect the credit transmission channel, but reduces the FX impact of lower interest rates,” Morgan Stanley analysts said in a report.
Now we turn to scandal that is growing around recent ECB QE decision:
Conservative policymakers slammed the European Central Bank’s lavish stimulus measures on Friday, voicing doubts about the need and effectiveness of a package that could consume most of the bank’s remaining firepower.
Facing a protracted growth slowdown, the ECB cut rates deeper into negative territory on Thursday and relaunched fresh bond purchases with no scheduled end-date, a move that divided the normally collegial Governing Council.
Although no vote was taken, sources with direct knowledge of the discussion said that over a third of policymakers opposed the fresh asset buys, pushed by outgoing ECB chief Mario Draghi, an unusually high number for a body that normally strives for consensus.
“This broad package of measures, in particular restarting the asset purchase program, is disproportionate to the present economic conditions, and there are sound reasons to doubt its effectiveness,” Dutch central bank chief Klaas Knot, a frequent critic of the bank’s ultra-easy monetary policy, said.
While disagreements are frequent, ECB policymakers usually line up behind decisions and refrain from openly criticizing its policy.
Bundesbank President Jens Weidmann, another key critic, also said the stimulus was excessive, and Thursday’s decisions indicated that rates will stay low for a long time.
Germans have been especially irked by negative ECB rates and mass-selling newspaper Bild portrayed Draghi as “Count Draghila”, a blood-sucking vampire, who is sucking dry the bank accounts of German savers.
Other dissenters on Thursday included French central bank governor Francois Villeroy de Galhau, ECB board member Benoit Coeure, also a Frenchman, German board member Sabine Lautenschlaeger and Estonian central bank chief Madis Müller, sources told Reuters.
While each policymaker gets one vote, the dissenters represented countries that account for more than half of the euro zone’s gross domestic product (GDP).
Knot said the euro zone economy is running at full capacity, wages are increasing and that financing conditions are so easy that they do not impede the flow of credit.
“There are increasing signs of scarcity of low-risk assets, distorted pricing in financial markets and excessive risk-seeking behavior in the housing markets,” added Knot, a member of the ECB’s policy-setting Governing Council.
Austrian central bank chief Robert Holzmann, meanwhile, said he was worried the ECB had made a mistake and that such a broad package should not have come before the bank’s planned policy review, which could even see the inflation target of just below 2% lowered.
“This (review) is something I had hoped the bank should have been doing before making this decision,” Holzmann told Bloomberg TV.
“It may be that 2% (inflation) at the moment is out of reach and 1.5% also signifies stable prices, almost stable prices. So there is no need to ... use all the power you have in order to move up to 2% if the cost is too high,” he added.
So, recent ECB decision rises the wave of critics among major bankers which could impact on realization of QE programme. When situation becomes worse, the argue becomes louder.
And finally we take a look at coming Fed meeting next week.
“If the Fed gives forward guidance that suggests less than what the market is thinking, then you will probably see markets sell off,” said Jamie Cox, managing partner of Harris Financial Group in Richmond, Virginia. “So long as the Fed plays along with what markets are pricing in...I think markets will be very stable.”
The Fed's 180-degree pivot from tightening monetary policy last year to easing it has helped drive the stock market's overall strong performance in 2019. The benchmark S&P 500 .SPX has climbed 20% this year and is near all-time highs.
The central bank in July cited signs of a global slowdown, simmering U.S.-China trade tensions and a desire to boost too-low inflation as it lowered borrowing costs.
Markets are pricing in a near 90% probability that the Fed will shave another quarter point from its current overnight lending rate of 2.00% to 2.25%, according to the CME Group’s FedWatch tool. There is a roughly 65% probability that the Fed makes at least one more quarter-point cut by the end of the year, according to FedWatch.
“The market is going to want to see a focus that we have a cut and there is likely more coming,” said Keith Lerner, chief market strategist at SunTrust Advisory Services in Atlanta. “They want to know that the Fed is vigilant and will act aggressively if needed.”
That raises the importance of the newest set of policymakers’ rate-path projections - the so-called dot plot - that will be released along with the rate decision. UBS economists said in a note they expect that will shift lower overall for 2019, but project only two cuts total for the year, which could irk both investors and a U.S. president eager for a more aggressive posture.
President Donald Trump has frequently criticized the Fed for not cutting rates more swiftly and significantly, with the Fed chair he appointed, Jerome Powell, the primary target of his ire.
The European Central Bank’s decision on Thursday to cut interest rates and restart a larger stimulus program could further pressure the Fed to cut rates, as the ECB’s move stands to weaken the euro against the dollar and thereby drive up the price of U.S. exports - an issue that especially vexes Trump.
Powell, who will give a news conference after the central bank issues its statement, has made comments in the past that have shaken the market, including in July, when he said the bank’s rate cut might not be the start of a lengthy easing campaign to shore up the economy.
“Every meeting has the ability for Jay Powell to say something that upsets markets a little bit,” said Arthur Hogan, chief market strategist at National Securities Corp.
Powell “has had enough practice to know that he does not want to move markets or make news,” he added.
Of the past eight easing cycles since 1981, four have been “insurance” cycles, when economic problems loom but the economy is not in a recession, while four were pre-recession cycles, according to research from Allianz Global Investors.
One year into an easing cycle, the S&P 500 rose an average of 20.4% during insurance cycles, while the index fell an average of 10.2% during pre-recession cycles, according to Allianz.
“Historically, what they’re doing now, which is cutting rates in an economy that is not in a recession and not really in any imminent risk of a recession, has been positive for the stock market,” said Mona Mahajan, U.S. investment strategist at Allianz.
The stock market overall has typically responded well to a second rate cut, which Wednesday's would be, with the Dow Jones Industrial Average .DJI rising an average of 20.3% one year later, according to Ned Davis Research. The weakest performance has come when the Fed tried and failed to prevent a recession.
The probability of a recession in the next 12 months is nearly 38%, its highest in about a decade, according to the New York Fed’s recession indicator, which is based on the U.S. Treasury yield curve. Last month, yields on two-year U.S. bonds exceeded those on 10-year notes, an inversion of the yield curve that is seen as an omen of recession.
An escalation in the U.S.-China tariff war is contributing to economic uncertainty and is top among concerns for stock investors. Late last month, a key speech from Powell was upstaged when Trump issued tweets that heightened trade tensions.
“I do think it’s important that the Fed helps ease financial conditions and helps reduce the probability of recession,” SunTrust’s Lerner said. “If the tariff fight ratchets up more, then what the Fed does, the effect will be less.”
So, in September the most interesting thing is what J Powell will tell on US economy and next stage of Fed policy. As we've mentioned the stock market, I would like to show you, guys, CFTC report on S&P index:
source: cftc.gov
Charting by Investing.com
As you can see, net speculative positions on S&P are choppily dropping and this week they turn to negative area. While market is climbing higher - investors close their positions. This makes us think that J Powell view on further rate cut will be not as cloudless as market suggests. It could become really supportive factor for US dollar.
So we have taken a look at all important events of this week and, as a bottom line, we could acknowledge that:
- exempting EU banks from the penalty charge lightly relates to the EUR value and EUR/USD rate. We treat this factor mostly as emotional and short-term;
- Mass disagreement of major EU bankers with ECB policy could become a barrier for ECB to follow its strategy. QE programme could be diminished, for example, or even cancelled. In fact any disagreement in EU banking sector will have negative impact on recovery of EU economy;
- Recent US data confirms our major background for long-term bearish view as we see significant disbalance of EU and US economy and its perspective;
- Speaking on coming Fed decision, it seems that Powell should step out from dovish perspectives as they do not correspond to current economy conditions;
- We think that worry on US-Sino tariffs' impact on US economy is overvalued. As we mention above - Retail sales shows growth for 6 consecutive months with above 4% annual level. First tariffs were imposed in March 2018, more than the year ago - where is negative impact?.
In shorter-term perspective, fundamental analysis suggest closer view on recent EUR positive reaction as it should be short-term. Thus we need to be careful to any bearish signs on EUR/USD on coming week.
I have to split report in two parts guys as it is too big for the Forum...
This week has passed under the sign of ECB meeting. In our previous weekly report we've estimated that EU economy is far from good condition and stands at the edge of recession. EU GDP data was able to show 0.2% growth, but Germany MoM GDP has shown -0.1% recession and overall situation lets us to suggest that this is not short-term situation. Fathom consulting in its recent report tells that difficult situation in Germany will last at least for two more quarters.
Except ECB, we also have got some US data. If PPI and CPI are lagging indicators and make minor impact on the markets - Retail sales is quite different tune. As I said in video, Retail sales takes 70% of national GDP and it uses in different statistic regression models for GDP data prediction. R. sales releases monthly and investors always stand careful to them.
U.S. retail sales increased more than expected in August, pointing to solid consumer spending that should continue to support a moderate pace of economic growth.
Retail sales rose 0.4% last month, lifted by spending on motor vehicles, building materials, healthcare and hobbies. Data for August was revised slightly up to show retail sales increasing 0.8% instead of 0.7% as previously reported.
Economists polled by Reuters had forecast retail sales would gain 0.2% in August. Compared to August last year, retail sales advanced 4.1%. Retail sales have increased for six straight months, the longest such stretch since June 2017.
But with the Trump administration this month slapping a 15% tariff on Chinese consumer goods such as televisions, apparel, bed linens, smart watches and footwear, there are concerns retail sales could pull back. Economists and retail groups expect businesses will pass on the duties to consumers, thereby raising prices for the targeted goods.
“It is too early to assess the impact of the new tariffs that took effect at the beginning of this month, but they do present downside risks to household spending,” said Jack Kleinhenz, chief economist for the National Retail Federation in Washington.
Households’ worries about the new round of tariffs were also underscored by a small rise in consumer sentiment early this month. The University of Michigan said its survey of consumers found that concerns about the impact of tariffs on the economy rose in early September.
Excluding automobiles, gasoline, building materials and food services, retail sales climbed 0.3% last month after increasing by a slightly downwardly revised 0.9% in July. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. They were previously reported to have jumped 1.0% in July.
Here is what I've said above - Consumer spending, which accounts for more than two-thirds of the economy, increased at a 4.7% annualized rate in the second quarter, the most in 4-1/2 years.
Economists expect consumer spending will slow to just below a 4.0% rate in the third quarter, which would be more than enough to keep the economy growing at a steady pace, rather than tipping into recession as signaled by financial markets.
“The trend in consumer spending growth still looks very solid,” said Michael Feroli, an economist at JPMorgan in New York. “Consumers remain the locomotive of the economy.”
Strong consumer spending is encouraging retailers to boost inventory. A second report from the Commerce Department on Friday showed business inventories increased 0.4% in July after being unchanged in June. Stocks at retailers rebounded 0.8%, the most in six months, after falling 0.2% in June.
The inventory increase bodes well for GDP growth this quarter. The Atlanta Fed is forecasting the economy to grow at a 1.8% rate in the third quarter. The economy grew at a 2.0% rate in the April-June quarter, down from the first quarter’s brisk 3.1% pace.
Financial markets have fully priced in a rate cut at the Fed’s Sept. 17-18 policy meeting. Most economists expect additional monetary policy easing in October and December. While underlying consumer prices have accelerated in the past three months, inflation is likely to remain benign.
In a fourth report on Friday, the Labor Department said import prices dropped 0.5% last month amid declines in the cost of petroleum products and food. In the 12 months through August, import prices decreased 2.0% after dropping 1.9% in July.
Import prices have now declined for five straight months on an annual basis.
Low inflation, the lowest unemployment rate in nearly half a century and about $1.27 trillion in personal savings are underpinning consumer spending. Even as the economy has been slowing, layoffs have remained low.
Last month, auto sales accelerated 1.8% after edging up 0.1% in July. Sales at building material and gardening equipment stores jumped 1.4%, the most since January.
Online and mail-order retail sales increased 1.6% after shooting up 1.7% in July. Receipts at health and personal care stores rose 0.7%, mirroring a jump in healthcare inflation in August. Americans also spent more at hobby, musical instrument and book stores, boosting sales 0.9%.
The report from the Commerce Department on Friday could further allay financial market concerns of a recession, which have been fueled by a year-long trade war between the United States and China as well as slowing global growth.
Still, the Federal Reserve is expected to cut interest rates again next Wednesday to blunt some of the hit from the trade tensions on the longest economic expansion in history.
Fed Chair Jerome Powell said last week he was not forecasting or expecting a recession, but reiterated the U.S. central bank would continue to act “as appropriate” to keep the expansion, now in its 11th year, on track. The Fed lowered borrowing costs in July for the first time since 2008.
“The winds of recession aren’t coming closer to shore if the consumer continues to buy their hearts out,” said Chris Rupkey, chief economist at MUFG. “Fed officials are unlikely to cut rates too much deeper as they seek to get out in front of the risks the economy faces acting early instead of being too late.”
The recent Retail Sales data is important for us, guys, because it indicates condition of US economy. With coming September rate cut, economy will get additional support to stay o course, money will become even more cheaper in US.
This in turn, gives us assurance that the core of our long-term strategy stands intact - solid disbalance on US and EU economy conditions. We have healthy consumption, low unemployment, moderate inflation on one side and coming QE, economy at the edge or recession on the other side, with no reserve for rate cut from ECB. This balance should hold, which let us to keep our long term bearish view on EUR/USD.
CFTC data also shows, at least on EUR that investors keep shorts intact, despite recent ECB statement:
Source: cftc.gov
Charting by Investing.com
In wider view, speculators reduced their bullish bets on the U.S. dollar in the latest week, according to calculations by Reuters and Commodity Futures Trading Commission data released on Friday. The value of the dollar's net long position, derived from net positions of International Monetary Market speculators in the yen, euro, British pound, Swiss franc and Canadian and Australian dollars, was $13.33 billion in the week to Sept. 10. That compares with a net long position of $14.24 billion in the previous period.
In a wider measure of dollar positioning that includes net contracts on the Brazilian real and Russian ruble,
the U.S. dollar posted a net short position valued at $12.58 billion, down from $13.11 billion a week earlier.
Early this week, the dollar drifted lower as investor appetite for higher risk currencies found support on a report of German stimulus plans, diminishing chances of a no-deal Brexit and hopes of a breakthrough in the U.S.-China trade war.
Since then, the dollar has fallen further as the euro has gained following the European Central Bank's decision on Thursday to exempt euro zone banks from a penalty charge, which analysts say will reduce the currency impact of new stimulus. The ECB on Thursday cut its deposit rate to a record low -0.5% from -0.4% and said it will restart bond purchases of 20 billion euros a month from November. The purchases will run for
as long as necessary and end shortly before it starts raising the key ECB interest rates.
It is not simple story around recent ECB statement, but let's take a look first, what ECB promises to the markets.
The euro skidded below $1.10 on Thursday after the European Central Bank cut interest rates and unexpectedly relaunched a quantitative easing programme as well to boost the region’s economy.
Investors had expected a rate cut at Thursday’s meeting but there was some uncertainty as to whether policymakers would restart a QE programme after some ECB members expressed doubt in recent weeks about the need to relaunch asset purchases.
Stephen Gallo, European Head of FX Strategy at BMO Capital Markets, said that if the ECB prepared the market for significant rate cuts ahead, “that would be quite dovish, quite bearish” for the euro.
A few minutes later EUR turns to rally after the European Central Bank launched new stimulus but failed to live up to some dovish market expectations. It also said it expects bond purchases to run for as long as necessary and end shortly before it starts raising the key ECB interest rates.
“We got a little bit of everything, but when all was said and done I think markets were expecting the bazooka to come out, and we definitely didn’t get the bazooka,” said Win Thin, global head of currency strategy at Brown Brothers Harriman in New York.
But in fact, I suggest that this news was a decisive for EUR rally on Thursday - "The euro was also boosted after the ECB said that euro zone banks will be exempted from paying a penalty charge on idle cash worth six times their mandatory reserves."
“Cutting the deposit rate and introducing ‘tiering’ at the same time was likely to have a mixed impact on the EUR and that seems to be one of the reasons why the weakness in EURUSD on Thursday reversed abruptly,” Stephen Gallo, European head of FX strategy at BMO Capital Markets said in a report on Friday.
By exempting banks from the penalty charge, the ECB aims to minimize stress in financial institutions that have been harmed by years of low rates.
Tiering aims to protect the credit transmission channel, but reduces the FX impact of lower interest rates,” Morgan Stanley analysts said in a report.
Now we turn to scandal that is growing around recent ECB QE decision:
Conservative policymakers slammed the European Central Bank’s lavish stimulus measures on Friday, voicing doubts about the need and effectiveness of a package that could consume most of the bank’s remaining firepower.
Facing a protracted growth slowdown, the ECB cut rates deeper into negative territory on Thursday and relaunched fresh bond purchases with no scheduled end-date, a move that divided the normally collegial Governing Council.
Although no vote was taken, sources with direct knowledge of the discussion said that over a third of policymakers opposed the fresh asset buys, pushed by outgoing ECB chief Mario Draghi, an unusually high number for a body that normally strives for consensus.
“This broad package of measures, in particular restarting the asset purchase program, is disproportionate to the present economic conditions, and there are sound reasons to doubt its effectiveness,” Dutch central bank chief Klaas Knot, a frequent critic of the bank’s ultra-easy monetary policy, said.
While disagreements are frequent, ECB policymakers usually line up behind decisions and refrain from openly criticizing its policy.
Bundesbank President Jens Weidmann, another key critic, also said the stimulus was excessive, and Thursday’s decisions indicated that rates will stay low for a long time.
Germans have been especially irked by negative ECB rates and mass-selling newspaper Bild portrayed Draghi as “Count Draghila”, a blood-sucking vampire, who is sucking dry the bank accounts of German savers.
Other dissenters on Thursday included French central bank governor Francois Villeroy de Galhau, ECB board member Benoit Coeure, also a Frenchman, German board member Sabine Lautenschlaeger and Estonian central bank chief Madis Müller, sources told Reuters.
While each policymaker gets one vote, the dissenters represented countries that account for more than half of the euro zone’s gross domestic product (GDP).
Knot said the euro zone economy is running at full capacity, wages are increasing and that financing conditions are so easy that they do not impede the flow of credit.
“There are increasing signs of scarcity of low-risk assets, distorted pricing in financial markets and excessive risk-seeking behavior in the housing markets,” added Knot, a member of the ECB’s policy-setting Governing Council.
Austrian central bank chief Robert Holzmann, meanwhile, said he was worried the ECB had made a mistake and that such a broad package should not have come before the bank’s planned policy review, which could even see the inflation target of just below 2% lowered.
“This (review) is something I had hoped the bank should have been doing before making this decision,” Holzmann told Bloomberg TV.
“It may be that 2% (inflation) at the moment is out of reach and 1.5% also signifies stable prices, almost stable prices. So there is no need to ... use all the power you have in order to move up to 2% if the cost is too high,” he added.
So, recent ECB decision rises the wave of critics among major bankers which could impact on realization of QE programme. When situation becomes worse, the argue becomes louder.
And finally we take a look at coming Fed meeting next week.
“If the Fed gives forward guidance that suggests less than what the market is thinking, then you will probably see markets sell off,” said Jamie Cox, managing partner of Harris Financial Group in Richmond, Virginia. “So long as the Fed plays along with what markets are pricing in...I think markets will be very stable.”
The Fed's 180-degree pivot from tightening monetary policy last year to easing it has helped drive the stock market's overall strong performance in 2019. The benchmark S&P 500 .SPX has climbed 20% this year and is near all-time highs.
The central bank in July cited signs of a global slowdown, simmering U.S.-China trade tensions and a desire to boost too-low inflation as it lowered borrowing costs.
Markets are pricing in a near 90% probability that the Fed will shave another quarter point from its current overnight lending rate of 2.00% to 2.25%, according to the CME Group’s FedWatch tool. There is a roughly 65% probability that the Fed makes at least one more quarter-point cut by the end of the year, according to FedWatch.
“The market is going to want to see a focus that we have a cut and there is likely more coming,” said Keith Lerner, chief market strategist at SunTrust Advisory Services in Atlanta. “They want to know that the Fed is vigilant and will act aggressively if needed.”
That raises the importance of the newest set of policymakers’ rate-path projections - the so-called dot plot - that will be released along with the rate decision. UBS economists said in a note they expect that will shift lower overall for 2019, but project only two cuts total for the year, which could irk both investors and a U.S. president eager for a more aggressive posture.
President Donald Trump has frequently criticized the Fed for not cutting rates more swiftly and significantly, with the Fed chair he appointed, Jerome Powell, the primary target of his ire.
The European Central Bank’s decision on Thursday to cut interest rates and restart a larger stimulus program could further pressure the Fed to cut rates, as the ECB’s move stands to weaken the euro against the dollar and thereby drive up the price of U.S. exports - an issue that especially vexes Trump.
Powell, who will give a news conference after the central bank issues its statement, has made comments in the past that have shaken the market, including in July, when he said the bank’s rate cut might not be the start of a lengthy easing campaign to shore up the economy.
“Every meeting has the ability for Jay Powell to say something that upsets markets a little bit,” said Arthur Hogan, chief market strategist at National Securities Corp.
Powell “has had enough practice to know that he does not want to move markets or make news,” he added.
Of the past eight easing cycles since 1981, four have been “insurance” cycles, when economic problems loom but the economy is not in a recession, while four were pre-recession cycles, according to research from Allianz Global Investors.
One year into an easing cycle, the S&P 500 rose an average of 20.4% during insurance cycles, while the index fell an average of 10.2% during pre-recession cycles, according to Allianz.
“Historically, what they’re doing now, which is cutting rates in an economy that is not in a recession and not really in any imminent risk of a recession, has been positive for the stock market,” said Mona Mahajan, U.S. investment strategist at Allianz.
The stock market overall has typically responded well to a second rate cut, which Wednesday's would be, with the Dow Jones Industrial Average .DJI rising an average of 20.3% one year later, according to Ned Davis Research. The weakest performance has come when the Fed tried and failed to prevent a recession.
The probability of a recession in the next 12 months is nearly 38%, its highest in about a decade, according to the New York Fed’s recession indicator, which is based on the U.S. Treasury yield curve. Last month, yields on two-year U.S. bonds exceeded those on 10-year notes, an inversion of the yield curve that is seen as an omen of recession.
An escalation in the U.S.-China tariff war is contributing to economic uncertainty and is top among concerns for stock investors. Late last month, a key speech from Powell was upstaged when Trump issued tweets that heightened trade tensions.
“I do think it’s important that the Fed helps ease financial conditions and helps reduce the probability of recession,” SunTrust’s Lerner said. “If the tariff fight ratchets up more, then what the Fed does, the effect will be less.”
So, in September the most interesting thing is what J Powell will tell on US economy and next stage of Fed policy. As we've mentioned the stock market, I would like to show you, guys, CFTC report on S&P index:
source: cftc.gov
Charting by Investing.com
As you can see, net speculative positions on S&P are choppily dropping and this week they turn to negative area. While market is climbing higher - investors close their positions. This makes us think that J Powell view on further rate cut will be not as cloudless as market suggests. It could become really supportive factor for US dollar.
So we have taken a look at all important events of this week and, as a bottom line, we could acknowledge that:
- exempting EU banks from the penalty charge lightly relates to the EUR value and EUR/USD rate. We treat this factor mostly as emotional and short-term;
- Mass disagreement of major EU bankers with ECB policy could become a barrier for ECB to follow its strategy. QE programme could be diminished, for example, or even cancelled. In fact any disagreement in EU banking sector will have negative impact on recovery of EU economy;
- Recent US data confirms our major background for long-term bearish view as we see significant disbalance of EU and US economy and its perspective;
- Speaking on coming Fed decision, it seems that Powell should step out from dovish perspectives as they do not correspond to current economy conditions;
- We think that worry on US-Sino tariffs' impact on US economy is overvalued. As we mention above - Retail sales shows growth for 6 consecutive months with above 4% annual level. First tariffs were imposed in March 2018, more than the year ago - where is negative impact?.
In shorter-term perspective, fundamental analysis suggest closer view on recent EUR positive reaction as it should be short-term. Thus we need to be careful to any bearish signs on EUR/USD on coming week.
I have to split report in two parts guys as it is too big for the Forum...