ECB: Make a low profile
Yesterday, the US Treasury organized a 10-year bond auction offering $ 23 billion. Let me remind you that US bond auctions need to be closely watched as the offer of bonds increases (in order to raise funds for tax reform), while increases in Rates and economic growth negatively affect demand in terms of returns and risk appetite. .
The yield to maturity was 2.957%, slightly less than the 3% mentioned previously. Investors demanded a slightly lower yield than last month's auction (2.96%). In the auction, the bid ratio on the hedge was 2.58 (2.55 in August), a sign of a still high appetite, the percentage of indirect buyers was 64% vs. 61.3% in August and above the six-month average (60.8%), brokers took 22.6% of securities and the remaining 13.4% fell on direct buyers.
Overall, the investment was quite successful compared to the 3-year bond auction, held on Tuesday, likely due to the fact that 10-year bonds were well absorbed in August (when the yield fell from 3% to 2.8%). The following investments, which are expected to occur at yields above 3%, will most likely start showing signs of weaker demand.
What do we know about the last meeting:
Rates should remain at current levels until at least the summer of 2019. The rational duration of such a policy depends on the time required for inflation to reach 2% in the medium term;
⁃ If the evolution of economic data is moving in the right direction, the volume of asset purchases will be reduced to 15 billion euros in September and the asset purchase program will be stopped at the end of the year.
The risks for the euro area remain broadly balanced. The shift to protectionism, the main challenge of world trade, remains a matter of concern. Financial market volatility requires close monitoring.
⁃ Inflation remains on the path necessary and will remain after the completion of QE, but for this, it is necessary to comply with other monetary measures to support the economy (low rate ).
Data received after the July meeting:
Second quarter GDP increased 0.4%, with a forecast of 0.5%. Annual economic growth slowed down to 2.1%, but 2.5% was expected. On the inflation front, core inflation rose by 1.1% in July, its highest level since September 2017, but already in August, it slowed to 1%, only not corresponding to forecasts. In general, the evolution of inflation does not allow us to take the ECB as a warmongering position, as trying to not rely on stimulus measures, thus suggesting the presence of inflation. Another source of price pressure is not yet possible. Among other data, which is pointing growth towards the slowdown, we can note the PMI for July and August without positive changes, strengthening the euro against the dollar. Enthusiasm, however, can be explained by changes in wage growth, which reached 2.2% in the second quarter.
Possible changes in the forecasting guidelines at today 's meeting:
It is unlikely that the ECB will be generous enough to give more clues to the timing of the rate hike, as it is not easy for the ECB to remain bold in its political moves without understanding how the impact of the next step of reducing the purchase of assets will affect the economy. . The situation of the Fed vis-à-vis the US economy is very different from the one with which the ECB has to work, and tariffs have not particularly affected European prices. It also makes no sense to drop a bullish index for euro buyers, on which the ECB also relies as a support factor.
It is even less logical to make changes to the pace of reductions in the asset purchase program. Therefore, in this part of the statement, we are not waiting for anything new. One can imagine an unlikely comment about a reduction in purchases, but only if there is a serious slowdown on the horizon that, of course, can thwart the ECB's plans, but it is very unlikely.
EC The ECB is likely to lower GDP forecasts and can again refer to the risks of trade tensions, but given the influence of these factors on future policy, their importance can be reduced by the market to 'in service' denominated.
Just in case, I would like to mention the bearish and bullish surprises, as well as their possible consequences.
Lower inflation forecasts, or allusions to extension of the asset purchase to 2019, will cause a significant decline in the euro, at the level of 1.14 – 1.13.
On the other hand, if the ECB "Even greater confidence" in inflation, a deep conviction in the need to complete the QE in 2018this will lead to the recovery of the EURUSD of at least 1.18
Please note that this document is provided for informational purposes only and should not be considered as investment advice. Financial market transactions are very risky.