Failure to accept the inevitable drives concern
One of the more interesting facts that emerged from yesterday’s meeting of the General Council of the ECB was that the vote on the wording of the press release was unanimous. All thirty members are concerned about the ability of the Eurozone to stand on its own two feet and survive and prosper without additional economic stimulus.
With such support, it was hardly a surprise that ECB President Mario Draghi felt sufficiently emboldened to continue his dovish stance at the subsequent press conference. Draghi expressed concern over the lack of inflation in the Eurozone economy despite it being gradually on the rise in certain countries.
It is highly likely that until unemployment falls below 8% inflation will remain benign in the region and since there is no precedent to enable analysts to model such an event, monetary policy will remain dovish certainly which Sr. Draghi is in charge.
The ECB did manage to drop its wording concerning any increase to its Asset Purchase Scheme but the hawkish tone of such an omission was last in the dovish overall tone. The Euro reacted violently but remains well supported at lower levels and a break above 1.2520 seems to be only a matter of time.
Ireland to be the Brexit battleground.
Donald Tusk the President of the European Council sounded yet another pessimistic note on Brexit yesterday calling for the UK to put forward a practical and workable solution for the issue if the border between the North and South in Ireland following Brexit.
It is becoming clear that there may be no answer to this issue as the UK won’t allow for Northern Ireland to be anything other than a 100% governed and administered from London with a land border between the two countries while the Eu will demand a hard border if no agreement can be found.
It is looking less and less likely that a transition deal can be verified at the EU Summit being held in a couple of weeks although it is eminently possible that the Irish question may continue to be deferred although it is impossible to countenance a Brexit deal being struck that omits any reference to Ireland.
Chancellor Philip Hammond now seems to have been uncommonly optimistic in has comment that a transition deal can be reached within a month.
Sterling remains vulnerable and could easily test the lower reaches of its recent range. With a further rally for the common currency also possible Sterling could fall to new lows bringing the inflationary consequences of a weak currency back to the fore.
Trade War? Be serious.
President Trump announced 25% tariffs on U.S. imports of steel and aluminium yesterday and then promptly “drew the teeth” of the announcement by allowing exemptions for Canada and Mexico which will allow NAFTA talks to continue. The concerns over a trade war have abated somewhat as the exemptions are likely to be extended and the tariffs will remain a weapon that “may never be fired”.
The positive reaction of the dollar was supplemented by the news that Trump and North Korean President Kim may meet, and such a meeting could take place before the end of May. If nothing else, that will give those talented cartoonists a day to remember.
In all seriousness however, the possibility of the removal of any nuclear threat from the Korean peninsula can only be a good thing.
Today sees the release of the February employment report in the U.S. This can now officially be called long-awaited since it is being released week later than normal. It is expected that the headline (which is receding in importance every month) will be around +200k but the risk is for a lower number, but it is the increase in the rate of wage rises that interests the market most.
Another read close to 3% will all but confirm a four-hike strategy from the Fed this year although its long-term effect on the dollar may be muted.