ECB Delivers Dovish Taper

Daily Analysis - 29/10/2017

Euro Area Central Bank Vows to Continue Low Rates

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The Euro fell to its lowest in 3-months against the greenback after the European Central Bank announced it will halve its bond-buying to €30 billion a month from January through September 2018.  The Central Bank also left the option open to extend measures further if necessary until inflation is sufficiently revived after keeping its latest guidance on interest rates unchanged.

Last Week


 

Contrasting sharply with expectations, the latest European Central Bank’s announcement was more dovish than forecast. Under President Mario Draghi’s watch, the Central Bank would not repeat its mistake from 2008 when it lifted interest rates. The other big news over the week was the US economy unexpectedly maintaining a brisk pace of growth, expanding at a 3.00% annualized pace during the third quarter. Federal Reserve Chair Janet Yellen had cautioned last month that third quarter growth could be “held down" by the severe disruptions caused by the hurricanes Harvey and Irma. On the political front, the conclusion of the week-long Chinese Communist Party Congress saw the election of Xi Jinping as President for a second term.

However, the spotlight was on the historic decision to incorporate “Xi Jinping Thought” into the party constitution, making Xi the first living leader since Chairman Mao to be conferred such an honour. In Japan, Prime Minister Shinzo Abe secured an overwhelming mandate in last weekend’s general election, paving the way for a fresh push to amend the country’s pacifist constitution. In other news from the Euro Zone, the German Ifo Business Climate Index touched a record high last week. However, improved sentiment comes amid the uncertain backdrop of the Catalan referendum and the final make-up of Angela Merkel’s ruling coalition.

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The Week Ahead


The upcoming week will be dominated by central Bank decisions as the Bank of England, the Bank of Japan and the US Federal Reserve meet to decide monetary policy direction. The UK’s initial estimate of third quarter GDP showed stronger than expected growth of 0.40%, with the upbeat data raising the odds that the Bank of England will hike interest rates this week, with the markets currently pricing in an 89.00% likelihood. By contrast, the Bank of Japan is nowhere near kick-starting the policy normalization process. With inflation still below 1.00% and dovish policymakers joining the Central Bank’s board, investors are anticipating policy to remain unchanged on Tuesday.

The Federal Reserve will be grappling with major US economic data releases for market attention next week. As no rate action is expected, the October jobs report due Friday could grab all the headlines. The hurricanes hitting the US East Coast caused nonfarm payrolls to drop for the first time in seven years in September. Payrolls are presently forecast to rebound by a massive 310,000 in October while the jobless rate is projected to remain steady at 4.20%. Another big release will be the Institute for Supply Management’s U. Manufacturing PMI for October, with the index expected to hover around the 59.0-mark after hitting a 13-year high of 60.8 in September.

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