Will the ECB do enough to save the day?

Good morning. The government’s latest wheeze to get the economy moving is to relax planning laws to boost the flagging construction sector. Homeowners will be able to build larger extensions without requiring planning permission, while shops and offices will also be able to expand. Anyone who has had the dubious pleasure of dealing with a council planning office might think this a good thing, although many will now be casting anxious glances over the garden fence in the coming months. However, regardless of one’s views on the probity of planning officers, it is hard to argue with critics of the scheme. They are quite rightly asking how allowing Nigel from next door to put up that ghastly PVC conservatory the planners had sensibly been vetoing for the last 15 years is going to generate sufficient economic growth to make up for slumping global trade and evaporating confidence? 

Today, the European Central Bank (ECB) announces their idea to do the same – save the world’s economy that is, not Nigel’s conservatory plans. However, the cat is already, at least partly, out of the bag. The ECB meeting itself began yesterday and information was unexpectedly leaked at lunch time suggesting that the Bank was putting in place an unlimited bond buying programme aimed at lowering borrowings costs for Spain and Italy. A Bloomberg report said ECB President Mario Draghi's plan includes buying unlimited amounts of government bonds, but also that these purchases would be sterilised*. This level of detail gave the leak some authenticity and eased fears that today’s announcement might just be another collection of statements of intent without any substantial plan of action. The result was a stronger euro against the pound and dollar, although sterling also felt the benefit. Cable breached recent resistance levels, hitting a 3 ½ month high. However, gains were limited as doubt remained about whether the full story is now known or whether the press conference at 13:30 this afternoon might still hold further surprises. There is an old city adage about ‘buying the rumour and selling the fact’ which could well see today’s euro gains unwound quickly if there is no fresh impetus following tomorrow’s announcement. 

With the UK service sector PMI data already leaked and the benefit for the pound already priced in, the markets were left with the European equivalent to give further direction, which itself is also only a final reading following a preliminary estimate released last week. The result at 47.2 was only marginally worse than the 47.5 preliminary reading. Other data was limited, but showed that European retail sales fell by 0.2% as expected which, coupled with the poor PMI data over the past few days has many analysts predicting that Europe is now back in recession. Canada left interest rates on hold and maintained the recent tone of the accompanying statement suggesting rate hikes might come, but not yet. The Canadian dollar fell on the news and struggled through the day, along with the other commodity currencies.

Aside from the ECB meeting, it shouldn’t be forgotten that the Bank of England are also meeting today, but it is expected to keep interest rates and its quantitative easing total unchanged and is not given to making any statement unless there is a shift in policy. US data later brings their equivalent of service sector PMI and overnight we get the Australian trade balance figures. However, should the ECB fail to generate any market movement, all eyes will turn to tomorrow’s non-farm payrolls.  Enjoy the day.

* This means that any money put into the system by the ECB in order to buy sovereign bonds would subsequently be taken back out again by another mechanism. This removes the risk of inflation and stops short of full blown quantitative easing that we have seen in the UK and US as no ‘new’ money is technically being created.