The Global Markets Weekly – 12/4/15

Posted December 7, 2015 by rvillareal

Andiamo Mario[private]

For the first time in several years, ECB actions fell well short of market expectations by adding only some limited stimulus at its December meeting. Still, they did deliver on some of the threats/promises of fresh action made at previous meetings.

Seemingly, the ECB is still worried that EMG softness and/or any fresh rise in the euro will weigh on Eurozone activity and thus temper, or at least delay, the expected pick-up in Eurozone inflation. As we have discussed before in this weekly and in other publications, the ECB may be exaggerating such risks.

In addition, any such EMG-related downside risks surely have to be placed alongside the upside risks that are actually materializing from the solid real activity backdrop domestically.  These include the stronger monetary dynamics and a drop in the jobless rate.  Despite being still a relatively high 10.7%, the current unemployment rate is only a percentage point above the long-term average.  There are also more positive business and consumer survey readings.  The latest PMI numbers are actually at levels more associated with ECB tightening moves.

The likelihood is that the underwhelming package of measures the ECB delivered at this juncture is a reflection of divisions, if not active dissent, within the Council, thereby tempering the more aggressive leanings of the dovish majority.  Perhaps ECB head Draghi wanted to maintain his honorary German citizenship, considering it prudent to keep his powder dry for 2016.

However, there may also be a more fermenting rationale for dissent within part of the ECB Council, namely a growing realization that reliance on currency depreciation to attain inflation goals will not only ultimately fail but could aggravate financial stability risks, if not in the Eurozone at this juncture, then in its neighboring economies.

• U.S.:  While major indicators, such as retail sales, arrive Friday, investors will pay little attention, resigned to Fed action on Dec. 16 and focusing more on the next one.  Investors know a good case could be made for the second Fed action coming later rather than sooner, perhaps skipping the January meeting as markets, facing potential fire sales, especially in mutual funds, sort themselves out.
• Eurozone: Updated Eurozone Q3 GDP data due on Tuesday is likely to reveal another solid consumer backdrop.  Otherwise the data is likely to highlight that the still-modest GDP data is very being tempered by the fact that solid domestic demand growth is still feeding through into robust import growth.
• UK: No-one expects the BoE to alter policy when it gives it next policy verdict on Thursday. But the minutes this time around are likely to suggest no immediate rush to start hiking rates, still stressing the impact of a still-strong pound in capping prices and acting as an offset to a resilient domestic economy.
• Japan:  The GDP estimate should be unrevised (Tu) while machinery orders (Wed) should experience a correction.
• Other central banks:  In Switzerland, the SNB is therefore likely to repeat its recent messages, namely that it will continue to keep the sight deposit rate at -0.75% (Wed).  The ECB decision this week reduces some of the rationale for further action given the weaker real economic signals seen of late.  In New Zealand, the RBNZ decision (Thu) is expected that the official cash rate (OCR) will be maintained at 2.50%.  In Korea, the central bank is unlikely to change rates Thursday, despite essentially non-existent inflation.

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