Consensus expectations for the ECB tomorrow appear to include ECB purchases of Spanish and Italian front ends. Many also appear to expect some loosening of collateral requirements, but not rate cut or LTRO. 2yr Italian debt is currently trading just north of 2.5% yield.
That sounds reasonable. Explicit caps or intervention sizes takes away some flexibility as well as some of the ECB’s ability to exert pressure on the fiscal authorities, so the ECB may not announce them. Note also that, just to keep up appearances, the ECB will likely sterilize the purchases, possibly via the issuance of some bills or a minimum size for the deposit facility. BUT – to attract sufficient demand, the ECB will have to keep policy rates NON-NEGATIVE. In other words, a negative deposit facility rate is likely off the table – a view that is against broker consensus.
This all suggests that there may be some positive sentiment in the immediate aftermath of the announcement, followed by uncertainty as to how much the ECB will do and how the Bundesbank will react. In other words, déjà vu!
- UK Service PMI improved to 53.7 vs 51.2 exp and 51 prev
- Italy Service PMI improved to 44 in Aug vs 43.3 exp and 43 prev
- China HSBC Service PMI declined to 52 in Aug vs 53.1 prev
- FedEx cut their forecast last night to $1.37-$1.43 versus the street at $1.56. “Weakness in the global economy constrained revenue growth at FedEx Express more than expected in the earlier guidance.”
- FRB: Currently, we estimate all programs combined are holding down the 10-year yield by about 65 basis points
- Thurs: ECB, BoE, French Unemployment, US ADP, Jobless Claims, ISM Non-Mfg
- Fri: UK PPI Output Core, US Non Farm Payrolls, Canada Employment
- Sun: China IP, Retail Sales, Trade Balance, Japan Current Account, Eco Watchers Survey
- Mon: EU Sentix Investor Confidence, Australia NAB Business Confidence, China Money Supply
- Tues: Canada Housing Starts, Trade Balance