Post date: 11/03/2019 08:00
Even though markets had braced themselves for a dovish ECB meeting, the central bank managed to outdo expectations with a significant downward revisions of growth and inflation forecasts and the announcement of a fresh round of cheap long term financing for banks. This sent the Euro down towards 18-month lows, briefly piercing the 1.12 level. Mixed payroll data out of the US the next day steadied the common currency, but the dollar still ended the week up against every G10 currency except the Yen. Emerging market currencies also had a difficult week, with Latin American ones leading the way down after the US payroll report hammered risk assets in general.
This week politics will take centre stage, as critical Brexit votes are scheduled Tuesday and Wednesday. US inflation and retail sales will round up the week’s calendar of key events.
After a relatively quiet couple of weeks, we expect some volatile trading in Sterling this week. The Government’s withdrawal agreement is likely to be rejected again by large majority in Parliament Tuesday. We expect Parliament to then vote the next day to reject a no-deal outcome, and request an extension of Article 50 on Thursday. If we are correct, we should see a significant rally in the Pound. However, the uncertainty surrounding this path to an extension is unusually high. In particular, the last step in the sequence above (the request for an extension) is far from guaranteed, even if the first two steps take place as we expect. Markets are braced for a very volatile week.
The ECB downgraded its growth and inflation forecasts even further than markets were expecting. Further, it changed its forward guidance so that it now expects no hikes until December, and Draghi intimated that a delay till March had been discussed. Finally, a renewal of long term cheap financing operations (LTRO) for banks was announced, which most analysts had not expected.
It is interesting that this dovish turn coincided with some positive news from key business activity indicators. Composite PMIs is most countries were revised upwards, and the details of the fourth quarter GDP growth report were stronger than the headline, which was only held down by an inventory draw. We think this positive turn, combined with the weaker tone we are seeing in the latest US data could take the common currency back up toward the 1.15 level over the next few weeks.
We had mixed news from the February payroll report in the US. The headline numbers disappointed, with just 20,000 jobs created compare to expectations of nearly ten times that number. However, wages continue to trend up, and are now at a ten year high of 3.4%. Further, the household survey painted a very different picture. Unemployment ticked down, and underemployment dipped substantially. The clear uptrend in wages number in particular makes the inflation data key for the Federal Reserve wait and see stance and our call for no hikes in 2019.