ECB In Wait and See Mode

April 22, 2016

FX News Today

European Outlook: Asian stock markets were mostly lower, with Japan outperforming and posting modest gains, as the Yen weakened across the board. Generally though risk aversion is picking up again after U.S. stock markets closed in the red, following the mixed performance in Europe yesterday. U.K. stock futures are also down, U.S. futures mixed. Oil prices are up on the day, but the front end WTI future is holding below USD 44 per barrel. The DAX, which managed to close with a slight gain yesterday is heading for a quiet end to the weak and the FTSE is likely to continue to underperform amid Brexit concerns. Bund and Gilt futures could recover some of yesterday’s sharp losses with the unexpected Riksbank easing sparking concerns that the general outlook is worse than feared and the ECB dampening hopes of further easing in the near future. The calendar focuses on Eurozone PMI readings for Aprils, where we look for a modest improvement in headline rates, but a confirmation that growth in core countries is slowing down.

More poor data from Japan: Japanese Tertiary Industry activity shrank m/m by -0.1%, but this was better than expectations of a -0.4% fall, previously the index stod at 0.7%.  Meanwhile Manufacturing PMI fell 1.1 to 48 its lowest levels since December 2012, following the two earthquakes around the southern island of Kyushu (a major area of manufacturing) outlook continue to look uncertain. The JPY weaken against EUR GBP and USD. USDJPY rose over 110 on the data releases its highest since April 6th..

ECB In Wait and See Mode, Helicopter Money Off the Table: No big surprises from the ECB yesterday, with the central bank focused on implementing the March easing package and effectively in wait and see stance. The door to further easing remains open if necessary, but it is clear that for now nothing is in the pipeline and in our view September seems the earliest time for a serious policy review. However, even if the ECB might add additional measures in the future, Helicopter money certainly remains off the agenda.  The introductory statement explicitly stated that the focus at the central bank for now is the implementation of the measures announced in March. The overall assessment of the situation remains pretty much unchanged from the last meeting, with the risks to the growth outlook still seen on the downside and global headwinds and geopolitical risks seen as the main factors that could hit the still fragile recovery. Like the Bundesbank already said earlier in the week, inflation could fall back into negative territory in coming months, but the main scenario is still a pick up later in the year and a gradual rise through 2017 and 2018. No major changes to the central staff projections from March then .The EURUSD flirted with an attempt at 1.1400, but retreated to 1.1268 briefly, the pair currently trading at 1.1300.

Main Macro Events Today

 EMU PMI:  PMI readings are likely to be more mixed than the clear improvement in ZEW investor confidence and highlight once again the renewed divergence between countries. France seems to remain stuck in contraction territory, even if today’s national business confidence numbers showed some improvement. German PMI numbers are still expected to improve, but only slightly. For the Eurozone as a whole, we are looking for an improvement in the manufacturing PMI to 51.7 (med 51.8) from 51.6 and a rise in the services reading to 53.3 (med same) from 53.1. Stronger growth in smaller countries is helping to compensate for the weakness in the core, but economic momentum is slowing down, which will also start to have an impact on the labour market.

Canada CPI: We expect CPI, due today, to slow to a 1.1% y/y pace in March (median +1.2%) from the 1.4% clip in February. But CPI is seen rising 0.5% on a month comparable basis in March after the 0.2% gain in February. Gas prices jumped around 5% m/m in March after falling 6.9% m/m in in February and dropping 6.0% in January. Currency appreciation could restrain price growth. The BoC’s core CPI index is seen rising 0.4% m/m in March after the 0.5% gain in February, consistent with recent moves in this not seasonally adjusted index during March. Annual core CPI growth is expected to expand at a 1.8% y/y rate (median same at +1.8%) in March, down from the 1.9% pace in February and 2.0% clip in January.

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