The Global Markets Weekly – 6/6//14

Posted June 12, 2014 by rvillareal

ECB Credit Push

In a largely as-expected move, the ECB Council lowered rates for the first time since last November, cutting all three official measures—notably, taking the corridor-floor deposit rate into uncharted territory at -0.10%. In addition, and also in line with expectations, the ECB unveiled fresh liquidity measures:  loan-subsidizing targeted 4-year LTROs, a suspension of  the weekly operation that sterilizes the liquidity injected under the Securities Markets Program, and intensified preparatory work related to outright purchases in the ABS market.[private]

The combination of added liquidity (designed to depress very short-term lending rates), measures to encourage banks to lend, and cuts in official rates may have more chance of working at the current juncture than hitherto.  This is because of the nascent signs that credit demand is starting to recover.  Encouragingly, the last (April) batch of ECB monetary data suggested that overall lending may have started to recover—echoing the tone in the ECB bank lending survey released last month, which pointed to clearly better signs regarding both the supply and (particularly) the demand for credit.

What is clear is that the ECB is now very much interested in reviving Eurozone growth, principally by encouraging the nascent recovery in credit demand.  As such, the ECB is no longer acting merely to keep the euro intact as was the case with its last major unprecedented policy step with the introduction of the OMT in 2012.

• U.S.: May retail sales (Thu) will be the highlight, key in shaping Q2 consumer spending growth. April wholesale inventories (Tue) and total business inventories (Thu) will also be technical inputs into GDP calculations.
• Eurozone: The data slate this week is not detailed enough to divert markets from a further analysis of the ECB actions.  However, more upbeat messages may come in regard to the real economy, notably from the Eurozone Industrial Production reading (Thu).
• UK: Despite the BoE having altered its apparent reaction function, the Labor Market Report (Wed) will remain a clear focus of market attention, not just this month but for some time to come.
• Japan: The BOJ Policy Board has its regular monthly meeting  (Fri), and, while unlikely to make any change, will evaluate key data releases of the week—revised first-quarter GDP (Mon), May bank lending (Mon), April tertiary industry activity (Tue), and April machinery orders (Thu)—for satisfactory progress.
• Emerging Markets/Regions: In China, The second-week-of-the-month flood of macro data is due.  Expectations are that May statistics will show the economy as no worse and no better than in April. For Mexico, following the surprise rate cut by BdeM, data this week (CPI (Mon); industrial production (Wed) should fit the Bank’s description of the current economic situation as “slow growth-low inflation.” In Turkey, Q1 GDP (Tue) arrives. Consensus is quite optimistic (+4.2% Y/Y).  DE’s estimate is 3.5% Y/Y.

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