Market news – 26 July 2019

European Central Bank indicates that a raft of fresh easing measures will be announced in September...

• President Draghi paved the way this week for a fresh monetary stimulus package to boost the faltering eurozone economy and allay fears that the Bank would materially undershoot its inflation target (“below but close to” 2%) in the coming months. The ECB indicated that they would look into a range of stimulus options, including interest rate cuts and another quantitative easing package, leaving investors expecting a package of several measures (as well as a rate cut) in September. Draghi will be replaced by current head of the IMF, Christine Lagarde, after the October ECB meeting this year, with policy continuity expected to prevail after the change of leadership.
• Expectations are for a rate cut from the Bank of England later this year are also rising, from ~25% just one month ago to over 60% today. The frontrunner for Carney’s successor as Bank of England Governor, Gerard Lyons, is a proponent of “modern monetary theory”, which would involve combining easier monetary policy with an expanding fiscal deficit in order to fuel the economy.

…as the short-term economic outlook continues to sour (in contrast to the US)

• Euro area area PMIs disappointed overall in July, with the manufacturing composite reading 46.4 (consensus: 47.7) and the services composite reading 53.3 (consensus 53.3).
• Germany and France were two of the weaker readings – the composites read 51.4 (consensus: 52.4) and 51.7 (consensus: 52.5) respectively. The German manufacturing reading hit a seven-year low over the month, while French manufacturing stalled after what was a promising June number.
• This was consistent with the slightly weaker business confidence survey results from France this week, which showed the industrial sector indicator falling from 102 to 101 overall, with a notable deterioration in the outlook for global order books.
• The US June durable goods report showed steady core capex momentum, with notably larger than expected increases in core orders and shipments.
• The first estimate of US Q1 GDP was 2.1% (q/q, annualised), down from 3.1% in Q1 but ahead of consensus expectation of 1.8%. A strong rebound in household consumption and government expenditure drove the number, whilst private investment, inventories and net exports were a drag.
• With the firmer recent tone to US data, the broad consensus is now that the Fed will only cut rates by 25bp at the end-of-July meeting, rather 50bp.

Equities modestly higher, dollar strengthens, bonds yo-yo

• The S&P 500 made fresh highs midweek before falling back somewhat into the weekend. European equities were generally higher, whilst Asia was mixed.
• The dollar rallied, particularly versus emerging market currencies, as Fed rate cut expectations were pared back.
• Government bonds oscillated wildly around the ECB meeting; overall US yields were higher and eurozone yields lower.
• UK gilts continue to rally and the curve is now inverted (yielding less than Bank Rate) out to 2028.