Need for “an ample degree of monetary stimulus”
ECB President Mario Draghi stretched his credibility to the limit yesterday in a press conference which illustrated his continued concerns over the stability of the Eurozone economy. The possibility of his leaving office in late 2019 without ever having needed to hike rates became more probable as he said that inflation is yet to show sustained signs of an uptrend. Sr. Draghi has been a beacon of calm during a tumultuous period for the Eurozone, but traders are beginning to show concern at his continued dovishness.
The ECB did, as expected, agree to reduce the value of its asset purchase cutting the monthly amount from sixty billion euros to thirty billion but the programme was extended until September next year. The Euro feel to a three-month low against the dollar closing at 1.1640. The fall has continued in Asia setting a new low of 1.1624.
Next week sees the release of Q3 GDP data for the Eurozone with quarter on quarter growth expected to be 0.6% leading to an annual rate of 2.3%. There is concern following the ECB meeting that this may surprise to the downside although one quarter’s data is unlikely to have driven Draghi’s comments.
Sterling falls as Rate Hike doubts reappear
There was little in the GDP data released earlier in the week to encourage the Bank of England to hike rates at its meeting next week. In fact, the contrary was probably true despite traders attaching significance to the smallest possible quarter on quarter improvement.
Governor Mark Carney’s comment that a rate hike would become necessary “in the coming months” was perfectly constructed to provide some leeway to MPC members to decide on the merits or otherwise of a rate hike. The vote will no doubt be close 5-4 is possible either way but 6-3 in favour of no change is my prediction. If that becomes reality Sterling will face further weakness which will drive inflation higher particularly producer prices which had started to show some weakness as the pound has at least stabilized.
There have been very few outright hawkish comments from MPC members for some time. Andrew Haldane the Central Bank’s Chief Economist said that higher rates would be a “good news story” inasmuch as it would mean that there was confidence in the sustainability of economic growth. Even arch-dove Gertjan Vlieghe agrees that a hike may become necessary in the coming months echoing the Governors sentiment.
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Trump to announce Fed Chair
It seems that the choice of the new Chairman of the Federal Reserve has been narrowed down to two candidates; John Taylor and Jerome Powell. Taylor is the hawk, proponent of a rules based methodology which almost removes the need for an FOMC since there would be in place a formula which decides on a rate hike. Powell is the voice of experience being currently a member of the Federal Reserve Board of Governors. Wall Street in an unusual bout of conservatism still wants Janet Yellen to remain in the post since she is being the most dovish and therefore “investor friendly” choice.
The President is expected to make his decision before leaving for a summit in Asia next week.
The dollar has had a strong week benefitting from the woes of the euro and pound. The dollar index has reached a high of 94.87 as weakness of its largest constituent part, the common currency, pushed it through strong resistance at 94.00. Any follow through is likely to be limited ahead of the Fed announcement since the dollar has little to commend it.
Today sees the release of preliminary Q3 GDP data with year on year growth expected to be at 2.5%, lower that the final 3.1% rise seen in Q2 although there will be a series of revisions in the coming weeks/months.
