Dollar Rally Backed by Currency Fund, Snubbing Citigroup Caution

30 Nov 2015 | Author: | No comments yet »

ECB Draghi’s Deflation Antidote Is Beginning to Work: Analysis.

NEW YORK (AP) — Stocks were marginally lower in early trading Monday as traders returned from the Thanksgiving holiday. FRANKFURT: The world’s two biggest central banks will move decisively in opposing directions in the coming week, with the ECB almost certain to ease policy on Thursday and a US jobs report likely to seal the case for a Fed rate hike in December.Euro-zone government bonds interrupted this month’s rally as investors questioned European Central Bank policy makers’ ability to boost stimulus enough to push yields lower. Even after 432 billion euros ($457 billion) of public-sector debt purchases through Nov. 20, the ECB is struggling to stoke inflation, with prices rising just 0.3 percent this month from a year earlier in Germany, the region’s largest economy. Economists surveyed by Bloomberg unanimously predict officials will increase stimulus again this week, less than halfway through the quantitative-easing program, and most foresee multiple measures.

Manufacturing and services PMIs have been on an encouraging upward trajectory this year, which is also borne out by pickup in European Commission services confidence. The ECB will contemplate a wide range of measures, from a fairly uncontroversial deposit rate cut to more extreme — but highly unlikely — moves such as buying rebundled non-performing loans to resurrect bank lending. “With expectations high, the risk of disappointment is also high but as concerns are correctly focused on the structural headwinds to the inflation outlook, there is really no point in holding back or saving ammunition at this stage,” Societe Generale said in a note to clients. With expectations so high, “Draghi cannot beat them, but only meet them,” said Marius Daheim, a senior rates strategist at SEB AB in Frankfurt. “We are in wait-and-see mode.” “We are well below 0.5 percent in terms of the 10-year bund yield,” he said. “If the ECB includes other asset classes in its asset-purchase program, this takes some downside pressure off government bond yields. The Standard & Poor’s 500 index lost three points, or 0.1 percent, to 2,087 and the Nasdaq composite edged down two points, or 0.05 percent, to 5,124.

The cost of insurance to protect against inflation going above ECB’s 2 percent target has recently edged higher, and is now above the record low hit in December 2014. IN CONTRAST: While the ECB moves toward increasing stimulus, the Federal Reserve is getting ready to start raising interest rates for the first time since June 2006. A series of U.S. economic reports this week, culminating with Friday’s jobs survey for November, could cement investors’ expectations for a rate hike at its meeting in mid-December.

The biggest complication to all this is the small but significant group of opponents to such action, led by Bundesbank chief Jens Weidmann and board member Sabine Lautenschlaeger, who broke ranks with their Governing Board peers recently to openly oppose further easing. Arguing that loose monetary policy poses risks and merely buys time to fix structural problems, Lautenschlaeger has taken a stance against any more steps, especially an expansion of the asset-buying programme.

Draghi may have his work cut out bridging the gap between their views, as the ECB rarely votes at meetings and instead decides on policy with the broadest possible consensus. Markets may need to see actual realized inflation before generating a convincing upward trend, given Japan’s unsuccessful attempts to revive inflation. His opponents could also make it tough for Draghi to continue his practice of promising big things, then exceeding the already heightened expectations. “Expectations have increased further ahead of next week’s ECB meeting and ECB speakers have not done much to rein in expectations. Realized inflation will likely get a leg up over the next few mos. due to base effect from the steep declines of oil in fourth quarter of 2014, but that should be no surprise. Retail stocks fell after initial data from Black Friday and the first holiday shopping weekend showed shoppers were not going to stores as much as last year.

Third-quarter ECB Survey of Professional Forecasters shows inflation will reach 1.5 percent in two years, compared with 1.2 percent estimated in March. Citigroup said that to surprise the markets, the ECB would need to cut the deposit rate, increase its monthly bond-buying and adjust its forward guidance by extending the programme or removing its reference to ending it next September.

Data on Friday is expected to show that US non-farm payrolls increased by 200,000 in November, keeping the jobless rate at a 7-1/2 year low of 5.0 per cent. The biggest headwind for the Fed could be the dollar’s rapid firming against major currencies in recent months, which has already effectively tightened monetary conditions. Fed Chair Janet Yellen’s testimony to the Joint Economic Committee of the Senate on the economic outlook, due at the same time as Draghi’s press conference, will likely give more clues about the Fed’s next moves. Among other top central banks, the Reserve Bank of Australia and the Bank of Canada are both expected to keep rates on hold with their respective economic outlooks in line or slightly better than their previous forecasts.

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