As expected, the BoC left rates steady at 0.50%

April 14, 2016

ECB’s Constancio: Helicopter money would not make a big difference, adding that “its something that of course we are very much limited by the treaty to embark upon”. At the same time he stressed that the ECB’s Negative-Rate Policy has its limits, as “there is always the possibility of hitting the limit where the preference for cash withdrawals would set in”. He added that “the instruments should not push banks to pass on their additional direct costs by turning deposit rates negative or increasing lending rates to increase margins. Both developments would be problematic for our monetary policy goals”. For now Constancio argues that the net effect of the negative deposit rate is “positive for the euro area as a whole”, while stressing that it takes time for the positive effects to materialise fully.

Australian unemployment fell to a cycle low of 5.7% in March, which offset a Moody’s warning to the Australian government that it needs to hike taxes at its budget in May. As a result Australian dollar is now up against all the major peers between 0.3 to 0.9% expect the USD that has gained 0.5% against the AUD.

As expected, the BoC left rates steady at 0.50%. The growth outlook was boosted a bit too GoC yields pulled back to session lows in tandem with the drop in the Treasury 10-year rate following the stellar Treasury auction. The market had already reflected its approval of what Governor Poloz had to say in his press conference, where he maintained two way risk in terms of the policy rate (BoC is not “sidelined”). He also talked-up the negative shocks seen since January, which were more than offset in the projection by impending fiscal stimulus.

Fed’s Beige Book said activity expanded modestly in most Districts, though the pace of growth varied. The report, prepared by the Chicago Fed, did note though, that wages increased in 11 of the 12 Districts (excluding Atlanta), and there were signs of a pickup compared to the last survey period. The strongest wage pressures continued to be seen for occupations where there were labor shortages. Labor market conditions continued to strengthen, with only Cleveland reporting a decline. Consumer spending mostly increased and retailers remained generally optimistic about the growth outlook over the rest of 2016. Manufacturing mostly increased and nonfinancial services picked up too. Construction and real estate generally expanded too. While the report was mostly optimistic, nearly all the adjectives were moderate or modest, suggesting the hit to the economy from the oil recession is dissipating.

Main Macro Events Today

Euro Area CPI:  The consumer price index for March is expected to come in unchanged from the -0.1% in February. The March HICP (Harmonised index of consumer prices) was confirmed at -0.1% at the end of March and therefore the CPI reading probably follows in its footsteps. The difference between Italian and German inflation numbers (Italian HICP fell further to negative territory) likely makes the ECB’s job harder.

BoE Vote and Minutes: The BoE is widely expected to maintain an unchanged policy stance, by a unanimous vote. The start of rate normalisation is still a long way off and the uncertainty over the outcome of the Brexit referendum in July is the main focus for markets as polls are pointing to a close outcome at the Jun-23 referendum. We expect the vote will swing to the “remain” side given the fear of near- to medium-term economic disruption. However, there are signs that the uncertainty about what will happen in the event of leaving the EU has been casting a negative impact on economic activity. A survey published by Deloitte last Monday found that a “fog of uncertainty has descended on the corporate sector” as a consequence of uncertainty about EU membership.

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