- ECB easing speculation continues
- US durable goods report suggests stronger business spending ahead
ECB easing speculation continues
Financial markets price in further monetary stimulus from the ECB. Remarks from ECB President Mario Draghi added fuel to this process on Thursday. In an interview with the Lithuanian business daily Verslo Zinus he left the door open to further monetary stimulus. In remarks similar to those before the European Parliament he said that ‘we remain fully determined to counter risks to the medium-term outlook for inflation… we stand ready to use additional unconventional instruments within our mandate, and alter the size or composition of our unconventional interventions should it become necessary’. In addition, he noted that ‘economic conditions have been somewhat weaker than expected…however, we expect modest growth in the second half of the year’. His comments resulted in extra pressure on the euro. Recent data and ECB commentary suggest there is a risk of more easing over above the policy measures announced. However, the ECB is likely to first assess the impact of the TLTRO policies. Although the take-up of the September TLTRO was relatively low, Mr Draghi noted earlier this week that ‘the September and December operations should be assessed in combination’. In addition, we do expect economic data to improve going forward helped by the fall in the euro, better bank lending conditions, and a US-led rise in global demand. If instead the data continue to disappoint, the ECB will likely expand its monetary policy stimulus. There is a lot of uncertainty about what precisely it would do. The first step could be to expand its asset purchases by including corporate bonds and Euro-level agency debt. It would probably take a sharp deterioration in the outlook for ECB to launch government bond purchases given strong opposition from the Bundesbank.
Eurozone bank lending stabilising
Eurozone bank lending continues to show signs of improvement. Lending to the private sector adjusted for sales and securitisation fell by 0.9% yoy in August, compared to 1% in July. The monthly flow data provided evidence that lending is stabilising. Loans to non-financial companies fell by EUR 1bn in August, much less than the EUR 14bn decline seen in July. Meanwhile, loans to households rose by EUR 5bn after a EUR 2bn increase in July. These figures appear to support the ECB’s bank lending survey, which showed demand for loans increasing and lending conditions easing. We expect bank lending to continue to gradually improve, helped by the moderate economic recovery and the range of measures the ECB is taking to restore the sector to health.
US durable goods – outside transport category – pick up
August’s orders for durable goods for products like aircrafts, refrigerators an cars, tumbled last month after record high aircraft purchases the previous month. The report was roughly in line with expectations. Outside this volatile transport category, the forward looking components of the report were better. Orders of capital goods increased by 0.6% from -0.2% in July and the 3mo3m average annualized by 17.2%. Demand for electrical equipment and machinery picked up, while orders for new cars and parts declined by 6.4% after rising 10% in July. This is a positive sign for US business spending. Trends in ex. transportation orders tend to lead manufacturing output, suggesting there is stronger momentum ahead. Moreover, the ISM’s purchasing managers index, a gauge of manufacturing sentiment, climbed last month to 59 from 57.1 in July. Meanwhile, weekly jobless claims were also roughly in line with expectations. Initial jobless claims rose to 293k during the week ended September 20. Both ECB easing speculation and positive US data supported the dollar rally across the board. This resulted in EUR/USD breaking below 1.2700 before profit taking pushed prices back to 1.2750 overnight.