ECB: Remain modest
Yesterday, the US Treasury had offered an auction of ten-year bonds worth $ 23 billion. Let me remind you that events in US bond auctions should be closely monitored as bond supply increases (to raise money for tax reform), while rate hikes and economic growth negatively impact demand for yield and risk appetite.
The yield to maturity was 2.957%, slightly below the 3% I mentioned in the last review. Investors asked for a return slightly lower than last month's auction (2.96%). Within the auction, the bid-to-cover ratio was 2.58 (2.55 in August), suggesting a continued high appetite. The share of indirect buyers was 64% compared to 61.3% in August and above the average of six months (60.8%). ) Traders took 22.6% of the securities and the remaining 13.4% fell to direct buyers.
Overall, the placement was quite successful compared to the auction of 3-year bonds on Tuesday, most likely due to the fact that ten-year securities were well absorbed in August (when yields fell from 3% to 2.8%). The following placements, which are expected to take yields above 3%, will most likely show signs of weak demand.
What is known from the last meeting:
Expected Interest rates are expected to remain at the current level until at least the summer of 2019. The rational duration of such a policy depends on the time when inflation has to reach 2% in the medium term.
⁃ If economic data trends are heading in the right direction, the volume of asset purchases will be reduced to 15 billion euros in September and the asset purchase program will end at the end of the year.
⁃ The risks to the euro area remain broadly balanced. The step towards protectionism as the main challenge of world trade is still a problem. Volatility in the financial markets requires close monitoring.
⁃ Inflation remains on track and will continue after quantitative easing has been completed. However, other monetary policy measures to support the economy (low interest rates) must be respected.
The data obtained after the July meeting:
GDP rose by 0.4% in the second quarter, with a forecast of 0.5%, and annual economic growth slowed to 2.1%, although 2.5% was expected. On the inflation front, core inflation rose in July by 1.1%, the highest level since September 2017, but already in August it slowed to 1% and did not meet the forecasts. In general, inflation does not allow us to adopt the ECB as a hawk position, because trying not to rely on stimulus and thus suggesting the presence of another source of price pressure on prices is not yet possible. Among other data, which postpones growth towards a slowdown, we can note the PMI for July and August without positive shifts, strengthening the euro against the dollar. The reason for the enthusiasm, however, is likely to be the change in wage growth, which rose to 2.2% in the second quarter.
Possible changes in foresight at today's meeting:
⁃ It is unlikely that the ECB will be generous enough to provide further guidance on the rate hike period, as it is not easy for the ECB to remain bold in the political moves without understanding how the next stage of the reduction of interest rates will be Assets affect the economy. The Fed's situation with the US economy is very different from that with which the ECB needs to work, and tariffs did not particularly affect European prices. It also makes no sense to leave out a bullish note for euro buyers, on which the ECB is also based.
Noch It makes even less sense to change the pace of cuts in the asset purchase program. Therefore, we do not expect anything new in this part of the statement. An unlikely comment on a buyback rollback is only imaginable when a severe downturn threatens to distract the ECB's plans, but highly unlikely.
⁃ The ECB is likely to lower its GDP forecast and may once again refer to the risks of trade tensions, but given its impact on future policy, its importance may be downgraded from the market to "service readiness".
Just in case, I would like to mention bearish and bullish surprises and what they might do.
Lower inflation forecastsor notes too Extension of asset purchase for 2019will trigger a significant decline in the euro to 1.14-1.13.
On the other hand, when the ECB reports "Even more confidence" in inflation, a firm belief in the need to complete the QE 2018this will lead to a EUR / USD rally of at least 1.18
Please note that this material is provided for informational purposes only and is not considered investment advice. Trading in the financial markets is very risky.