ECB meeting in full focus
Last week’s headlines of a return to deflation in the Eurozone for the first time since 2016 were troubling. The ECB Chief Economist, Philip Lane, also warned that the value of the euro against the dollar mattered with regard to monetary policy. This came after the euro reached a two-year high against the US dollar, briefly breaking above $1.20. There was a negative development in the Eurozone’s efforts to provide relief measures to economies most adversely affected by the coronavirus pandemic. On Friday, Hungary refused to grant its final approval to the EU rescue funds, without guarantees on a linked mechanism on the rule of law. On the PMI front, Thursday saw the Euro aggregate services PMI for August rise on its final reading versus preliminary estimates. However, this was only thanks to Germany’s improved performance. The other major Euro countries, France, Italy and Spain, all saw their services activity readings drop from July readings, in France’s case very sharply indeed.
The euro had been see-sawing against other majors having made the gains in the early part of the week, but closed out the week just under 0.5% lower against the US dollar, and flat against the pound. It made some limited gains against the Japanese yen, although the yen itself sold off after PM Shinzo Abe announced he was stepping down due to ill health. The euro’s stronger performance in sessions up to last Tuesday was due mainly to the FX market’s distancing from the US dollar. Economically, however, there are increasing warning signals that the Eurozone may require additional stimulus. This may be either monetary, fiscal or both, and that could produce greater negative sentiment towards the euro, or at the very least present an additional hurdle for a retest of recent highs.
Already today, German industrial production figures for July have recorded just a 1.2% rise in output in July, versus an expected increase of 4.5%. Some modest upward revision to June output figures could not hide the disappointing outturn but should it have been that much of a surprise? The factory orders numbers last week were up barely half of what was expected, so output ought to have been expected to rise less, and consensus expectations looked overly optimistic. Expectations on today’s Eurozone Sentix investor confidence figures for September point to a further improvement in confidence versus August, but this looks at odds to other recent survey evidence, so don’t be surprised if confidence dips, rather than improves. The data calendar is light in terms of important releases, which leaves the way clear for markets to focus on the ECB Governing Council meeting on Thursday. Whilst no major changes are expected, the new inflation and growth forecasts will be scrutinised, and the press conference comments scoured for hints as to any new policy moves later in the year.
Unemployment drop threatens further stimulus
Last Friday’s US labour market data for August was keenly awaited by markets. The expectation was for another healthy 1.35m net gain in payrolls, and the unemployment to drop back below 10%. The payrolls increase was broadly on the money, but the unemployment rate fell to 8.4%, far in excess of what was expected. There had been some hints in other labour market releases earlier in the week that we could see a sizeable improvement, with the jobless claims figures dropping to 881k in the latest week, the lowest reading since the week ending 13th March. The news wasn’t all good though, with the Federal Reserve’s latest assessment of economic conditions indicating that the recovery was fragile, the jobs market at risk of significant layoffs once support schemes ended, and personal and business borrowing/creditworthiness had taken a turn for the worse.
That rise in payrolls and drop in unemployment may have inadvertently undermined the prospects of a bi-partisan deal on additional fiscal support for individuals and businesses struggling with the aftermath of the pandemic. The prospects were already fading, as the leaders of the House and Senate had failed to make meaningful progress on breaking the impasse, and these jobless numbers may have removed some of the pressure on the President and Republican-dominated Senate to make any concessions ahead of November’s Presidential election.
In absence of any major data releases in the early part of this week, and with the Labor Day holiday, the US dollar isn’t expected to make any significant additional headway against any of the other majors, at least not on a fundamental basis. The USD may experience some support, however, as the heat turns up on the Eurozone and UK.
UK/EU trade talk showdown
Last week’s informal UK/EU trade talks were, in short, a failure. Neither side gave any ground and no compromises were sought or suggested. Over the weekend, the UK press were full of stories decrying the abilities of the UK’s top negotiator. They also reported that the EU were determined to press ahead with the negotiating strategy, even if it was doomed to fail, or indicated that the UK was determined not to compromise and would walk away without a deal. This week’s talks are viewed as more crucial than before. If neither side can engineer a clever compromise, in which both sides can claim some success, then the prospects of no deal are likely to increase further. There are some important UK releases, but not until the end of the week, so until then the pound may well gravitate around the UK/EU trade deal orbit. This would likely mean that the prospects of any reasonable gains against the euro or US dollar are limited, at least in the early stages of the week.
The Bank of Canada were never likely to make any additional monetary policy loosening at their September meeting. After last Friday’s employment data, the chances of such loosening at this Wednesday’s meeting dropped from slim to none. Employment has recovered sharply in the past 4 months, recouping around 60% of the jobs lost in March and April. That still means that there are 1.1m fewer people employed versus the pre-COVID period, but proportionately Canada is doing better than its near neighbour, the US, in terms of re-employment. With the Bank of Canada highly likely to stand still on this occasion, the Canadian dollar could benefit a little further, retesting the C$1.30 level against the US dollar that it did early last week and before that at the beginning of the year.
Swiss National Bank President Thomas Jordan’s remarks at the end of last week were measured and targeted. He warned that the franc was ‘highly valued’, but that is just a polite way of suggesting it is overvalued, since he went on to imply the SNB would continue to intervene to keep it in check. Other than verbal intervention though, the tactics that could be deployed are limited to raising inflation pressures or expanding consumer demand. The Swiss franc’s rally post Jordan’s comments was modest, but with what the SNB have to work with, something, however modest, is better than nothing.