ECB To Maintain Substantial Degree Of Monetary Accommodation
James Woods | Feb 17, 2017 10:40
Originally published by Rivkin Securities
The euro gained +0.71% against the US dollar on Thursday despite the release of the ECB minutes from the central banks January meeting that highlighted that is was “imperative to maintain a very substantial degree of monetary accommodation for inflation pressures to build up”. Headline inflation in the Eurozone was at +1.8% year-on-year in January which is around the ECB’s target of just below 2%. However this reflects temporary factors such as the rebasing of oil prices with core inflation remaining stable at +0.9% showing no signs of momentum for price pressures with the first chart below highlighting the two measures of prices. The ECB is unlikely to deviate from the current stimulus program which is due to proceed at a pace of €60 billion from April through to December 2017.
With no major data released overnight the move in the euro was predominantly driven by a weaker US dollar. The dollar index weakened -0.69% with treasury yields as both the two & ten-year declined -4.5 & -4.8 basis points respectively. The demand from bonds came as equity traders took a break from new all-time highs and comments Federal Reserve Bank of New York President William Dudley that were interpreted as more dovish than those of Fed Chair Janet Yellen earlier this week.
Spot gold was certainly a beneficiary of the weaker dollar, up +0.52% overnight also being supported by upcoming election jitters in the Eurozone. The spread between two year French government bonds and those of Germany has continued to rise to be currently sitting at +0.267% the highest levels since mid-2012. The premium demanded to hold French securities over German has risen on the back of a pickup in the polls by National Front leader Marine Le Pen who has gained ground on the back of a scandal faced by Republican candidate François Fillion.
Polling shows Pen is favourite to win the first round of voting, although to lose comfortably to independent candidate Emmanuel Macron in the final round.
Locally the Australian dollar was -0.25% weaker this morning following Thursday’s unemployment data despite a positive headline figure highlights a significant degree of slack in the labour market. The unemployment rate declined to 5.7% from 5.8% with 13,500 jobs added in January on a seasonally adjusted basis. The decrease in the headline unemployment rate has been driven by part-time work with 159,400 part-time jobs added over the past year while full-time employment has decreased by 56,100.
That’s not to say part-time work is in anyway a negative, in fact it partly reflects the economy’s transition away from mining investment to more serviced based industries which tend to be more part-time focused. The fact part-time work has risen over full-time work matched by an increase in the underemployment rate reflects the weakness in the labour force. This currently sits around 8.5% reflecting the slack in the labour market which is expected to keep wage pressures and therefore inflation subdued.
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The S&P/ASX 200 swung between gains and losses before closing +0.12% higher. We can expect a flat start to trading this morning with ASX SPI200 futures down just 1 point in overnight trading.
h2 Data releases:/h2· Eurozone Current Account (MoM Dec) 8:00pm AEDT
· U.K. Retail Sales (MoM & YoY Jan) 8:30pm AEDT
· U.S. Leading Indicators (MoM Jan) 2:00am AEDT
· U.S. Baker Hughes Rig Count (Feb 17) 5:00am AEDT
Chart 1 – EU CPI (Blue) & EU Core CPI (Black)
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