Morning Commentary: Keeping the Floodgates Open

Foreign Exchange - Morning Commentary
Keeping the Floodgates Open
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David Atkinson
David Atkinson
Foreign Exchange Sales Manager
Historic carnage in global equity markets continues today.  European stock markets are down 7-8% after President Trump announced the imposition of a 30-day travel ban from Europe.  The red ink continues in the US with stocks down 7%, hitting the automatic stabilizers for the second time this week.

There has been some interesting chatter about the bond markets, with the 10-year Treasury seemingly able to keep going at steady rates the last few days, but reports out now point to severe strain in the liquidity of that system.  Earlier this week, the 10-year was around 81 basis points after recent lows of 31 basis points.  That said, the 10-year is down this morning, currently trading around 66 basis points as I write.

That general question of liquidity seems to have informed the European Central Bank.  The much-anticipated meeting today resulted in no change in their target rate of -0.50%.  The ECB did however focus on extra short-term liquidity to the markets in the form of repo operations – much like what the Fed has been doing for months and in fact increased those repo operations this week.

The no-change decision from the ECB was unexpected, and in my opinion, was a welcome breath of fresh air.  At this point in the negative interest rate cycle, what is an extra dozen basis points or so to a policy rate that seems to not be working anyway?  Interestingly, in the first few minutes after the announcement, we are seeing a lot of uncertainty in futures markets about what the ECB will do next.  The next scheduled ECB rate decision is April 30, and there is just a small chance currently of a cut at that meeting.

We have been writing about how data is almost meaningless these days, but it is interesting to note that initial jobless claims for last week came in lower than expected – 211K against expectations of 220K.  The Producer Price Index fell a bit more than expected for February – down -0.6% against expectations of a -0.1% decline.  Based on just those two limited data points, we can see a general deceleration of economic activity although that has not filtered into the job market yet.  We’ll see what happens next in that area.
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