Morning Commentary: Words Matter

Foreign Exchange - Morning Commentary
Words Matter
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Initially, the ECB’s January meeting was seen as placeholder between now and when things get interesting.  However, recent data flow as well as Governing Council (GC) member comments have made Thursday morning’s ECB announcement slightly more interesting.   

To be clear, the balance of risks still skew to the downside and there is no reason for the ECB to update its assessment of risks at a meeting that doesn’t include updated forecasts.  But, the tone from ECB officials could possibly change.

US-China trade and risks around the Brexit Withdrawal Agreement have subsided.  Additionally, data flow has shown signs of manufacturing stabilization and core inflation has moved to the ECB’s forecasted average for 2020.  As a result, it wouldn’t be surprising to hear the more hawkish members of the GC becoming more vocal with their opinions.

Upbeat economic data aside, the most interesting part of this week’s ECB meeting will likely be details around the strategic review.  While there are many topics that could be reviewed, inflation targets and measures are likely to be in focus.  Additionally, the timeline and the motivation for the review should garner attention. 

The start time for the review is known, but will there be an end date (Lagarde has hinted it will be done by end of 2020) or will it be an open-ended discussion?  With regards to motivation, words will matter.  The 16 years that have passed since the last review is justification enough for a reassessment, but markets have clearly taken notice of Lagarde’s statement that the ECB needs to get “closer to the people.”  This implies that the ECB could be concerned about the impact of negative rates.  The expectation still remains for Lagarde to be neutral with her language, but any indication that the ECB needs to acknowledge “side effects” or “unintended consequences” will be seized on.      
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • Fatalities from the Wuhan coronavirus have risen to nine cases with the US and Hong Kong reporting their first cases.  The World Health Organization is expected to decide today whether or not to designate a public health emergency of international concern.  This is a designation used for complex epidemics that can cross borders. After yesterday’s volatile session, markets appear to be calmer today as China’s National Health Commission has detailed the steps it is taking to contain the disease.  However, officials acknowledged that they’re still trying to understand the virus. 
  • The welfare costs of the coronavirus (nCov) are clearly high, but the economic implications are a bit murky.  Looking at the 2003 SARS episode, the outbreak peaked 3-4 months after the first case was reported and was mostly contained 6-7 months later.  Assuming a similar trajectory, the nCov outbreak may not peak until March-April.  However, this time around the outbreak comes amid the Lunar New Year (LNY) period where officials are estimating that 3 billion trips will be made.  The LNY travel period runs from January 10 to February 18.  Countering this have been more timely and credible communication and preventive measures by the government.  Ultimately, the hope is that this remains a transitory shock with the impact most felt in retail sales and transportation.    
  • The Bank of Canada maintained its overnight rate at 1.75% as expected.  However, the bank removed the word “appropriate” from its description of how it views it current overnight rate level, making the initial read dovish.  Gov. Poloz has held the view that rates were appropriate and the removal of this description signals less confidence in the BoC's outlook.  Additionally, YoY CPI slightly missed expectations, rising 2.2% versus expectations for a 2.3% rise. 
  • In Italy, bank stocks and sovereign bonds dropped after reports that Five Star Movement leader and Governing Coalition member Luigi Di Maio has announced his resignation from his leadership position, increasing the chances of an early election. 
  • The GBP is the biggest winner in the G10 space as market pricing for a BoE rate cut has dropped to 48% from 60% yesterday on the back of yesterday’s employment report.    
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