Vive la Revolution
2017 is a critical year for European politics not to mention the triggering of Article 50 and Trump.
Mario Draghi fulfilled analysts’ expectations yesterday by giving a firm pointer towards the ECB announcing its decision to taper QE at its 26 October meeting, seeking to ensure markets are well prepared for this and thereby avoiding a taper tantrum.
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Mario Draghi fulfilled analysts’ expectations yesterday by giving a firm pointer towards the ECB announcing its decision to taper QE at its 26 October meeting, seeking to ensure markets are well prepared for this and thereby avoiding a taper tantrum. There were no headline changes to its current policy stance, with all headline rates remaining the same. Indications are that the bulk of its QE plans will be unveiled in October, some further details revealed in December and then actual tapering commencing in January 2018. The further question on everyone’s lips was whether the ascent of the euro in recent weeks might put the brakes on the ECB’s tapering plans, given the additional drag this might imply for the inflation outlook. That question was more relevant still this morning, with the pointer to an October taper decision sending the Euro higher to a peak of $1.2059 during the press conference, not too far off its 29 August two and a half year high. At the time of writing it stood at $1.2054.
Clearly Mr Draghi was far from rejoicing about the Euro’s current standing; he noted the EUR/USD value of $1.20 (at the time of his press conference), but made no specific comment on the level. Mr Draghi did not give the impression the currency’s recent rise was a tapering show stopper and even erred on the side of seemingly playing down any hype over the Euro’s standing. Indeed, his approach to questions raised in the press conference was to flag the section in the opening statement that ‘the recent volatility in the exchange rate represents a source of uncertainty which requires monitoring’.
On the other side of the pond, New York Fed president William Dudley was the latest US central banker to lay out his views ahead of a policy setting meeting later this month as expectations for an interest rate increases have been scaled back. Dudley reiterated the need to continue raising rates while conceding that the Fed may have to rethink its inflation model. Meanwhile, the threat from North Korea lingers and the prospect remains that Pyongyang may conduct a further missile this weekend to coincide with its “founding day” on 9th September. President Trump said it’s not “inevitable” that the U.S. will end up in a war with North Korea over its continued development of nuclear weapons, though military action remains an option. “North Korea is behaving very badly and it’s got to stop,” Trump said at the press conference.
A slightly quieter day on the data front after expectation had built towards the key ECB announcement yesterday. In the UK we will see some figures out at 9:30am which will help shape expectations for the Q3 GDP growth figures, due out on the 25th October. We also have another US Fed member speaking today Patrick Harker speaks on consumer finance in Philadelphia at 1.45pm.
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After testing some key downside levels over recent days, following weaker than expected Chinese industrial production figures, industrial metals have staged a broad rally and appear to be on track for a 4th day of gains, supported by continued dollar weakness.
Currency markets were a little subdued yesterday ahead of today’s FOMC announcement that marks the key event of the week.
It has taken a hurricane to do it, but US gasoline inventories have finally shown a significant fall. Last Wednesday’s data releases showed that inventories fell by 8.4m barrels which brings inventories down well below this time last year.
Industrial Metals have largely eased in recent days following a steady run of price gains across the board. This is despite a weaker Dollar, particularly under pressure against the Euro following the ECB meeting last Thursday where President Draghi gave a firm pointer towards the ECB announcing its decision to taper its quantitative easing program at its October meeting.
Yesterday’s main headline news that really got the market moving was August’s headline CPI inflation number which was firmer than expected.