ECB Pauses on Policy

Daily Analysis - 22/07/2016

Governing Council Opts to Hold Off on Changes to Asset Purchase Program

After widespread speculation that the European Central Bank would need to quell concerns about the pace of asset purchases and available supply of assets to fulfill the ongoing quantitative easing program, the ECB disappointed markets with no action taken on monetary policy. While Draghi did manage to highlight nonperforming loans, the future of the ongoing policy strategy remains uncertain.

European Rates on Hold

In its latest decision, the Governing Council of the European Central Bank opted to leave monetary policy unchanged, leaving the asset purchase program operating at the same pace while the benchmark rate was held at 0.00% and the deposit facility remained at -0.40%. While ECB President Mario Draghi made fewer comments on monetary policy during his press conference, he did focus on the banking system especially amid concerns that banks in Italy may be insolvent when considering balance sheets full of nonperforming loans. To this extent, Draghi reiterated the need to address the bad asset problem, giving merit to the idea of a public backstop, especially during conditions that are considered extraordinary. While Italian banking stocks responded to the calls, rallying to the upside, the Euro was unmoved by the comments, with the EURUSD pair ending the session just modestly higher after very little press conference volatility.

Japanese Factory Activity Raises New Concerns

Following another denial that the Bank of Japan was considering helicopter money as a way to help stimulate economic activity, the latest data on manufacturing pointed to sustained weakness in exports despite certain metrics experiencing a pickup. According to a report issued overnight by Markit Economics, Japan’s preliminary Manufacturing PMI for the month of July remained in contractionary territory, printing at 49.0 versus expectations of 48.3. Although the figure did manage to beat estimates, when digging deeper into the components, some worrying trends become apparent. The main anxiety is in reference to new export orders and input prices, with new export orders declining at the fastest rates in 3.5 years while input price deflation remains an ongoing phenomenon. After several sessions of losses, the Yen snapped back, with the USDJPY pair falling back below 106.00 to trend near 105.95.

UK Retail Sales Highlight Brexit Deceleration

While limited data has been released since the British referendum late in June, figures relating to retail sales reported during the European trading session underlined the slowdown and contraction in economic activity in the lead up and aftermath of the vote. The headline monthly retail sales figure fell by -0.90% during June versus expectations of -0.60% decline, matched by the core retail sales number for the same period. Additionally, outside of retail which took a dive, public sector borrowing was also significantly lower, printing at GBP 7.31 billion during the month versus the GBP 9.41 billion lent during May to public entities. These indicators give credence to the idea of a looming recession that may force the Central Bank to ease interest rates. GBPUSD has managed to hold onto the previous two session’s gains, trending near 1.3250 ahead of services and manufacturing data to be reported later today.

US Existing Home Sales

Capping off a positive week of data for the housing sector, existing home sales announced by the National Association of Realtors showed that sales of residential structures climbed by 1.10% during the month of June to 5.57 million compared to the 5.51 million reported in May. Adding to the optimism displayed by housing starts and building permits from earlier in the week, the latest figures show that the housing sector remains robust despite several hiccups over the past year. Moreover, it continues to raise pressure on the Federal Reserve to continue normalizing policy by hiking rates before the end of the year, especially if recent gains in housing data should remain intact. While the US dollar has retreated modestly from multi-month highs reached earlier in the week, gold prices are slightly lower, falling back below $1330.00 per troy ounce to $1327.15.