This week’s major theme has been the ongoing US fiscal stimulus talks between House Speaker Nancy Pelosi and Treasury Secretary Steve Mnuchin. Headlines around the fiscal funding talks contributed to chopping and changing risk sentiment all week, flinging the US dollar with it. For now, it seems unlikely a deal will be reached before the election date, consistent with our prior expectations.
Continuously rising coronavirus cases and in turn the renewed restrictions across the eurozone have had an impact on overall risk appetite as well.
On Tuesday, the European Union attracted the highest demand for a bond sale ever and garnered a whopping 233 billion euros in bids. Italy tapped into demand from yield-hungry investors as a result, and raised 8 billion euros from a 30-year bond offering. A key driver of euro-debt demand in the past half year has been the European Central Bank’s Pandemic Emergency Purchase Programme, something that will certainly be addressed by Christine Lagarde in Thursday’s ECB press conference.
ECB’s PEPP made Italian debt a real blessing – Italian 30-year yields half of their April levels
THIS WEEK’S CALENDAR:
Germany’s IFO Business Climate, Expectations Index and Current Assessment index have all seen an uninterrupted sequence of expansions since May, but Monday’s 10:00 GMT reading may throw markets a curveball. Since the previous reading of September, Germany’s virus case count have arguably been rising at a rate that indicates the local pandemic is once again accelerating at an uncontrolled rate. Records of new daily infections have continuously been broken over the past week, both in Germany and throughout the entire bloc. German Chancellor Angela Merkel has solemnly promised to do all she can to prevent another nationwide lockdown, but with the current rate of infections, newly imposed restrictions in some form or another seem inevitable. September’s Purchasing Managers’ Indices already caught a glimpse of the surge in case count over the last month – especially the services sector – which may paint a picture for other sentiment data releases like the IFO reading in the weeks to come.
The greenback may take cues from the US Durable goods orders and Conference Board consumer sentiment releases on Tuesday 12:30 GMT. Last month, bookings for durable goods increased 0.5%, below the consensus of a 1.5% gain. In September, the figure is set to print at 1.0% according to the median of forecasts submitted to Bloomberg.
Any positive surprises may strengthen the US dollar, however, the downside may be limited given re-emerging growth concerns as the global virus situation is worsening.
The Conference Board Consumer Sentiment index is set to only slightly increase from September’s 101.8 to 101.9.
Finance Minister Tito Mboweni is to present South Africa’s Medium Term Budget Policy Statement to lawmakers on Wednesday. The budget was initially scheduled to be announced last week, but was delayed to implement the latest policy changes. The budget policy statement will outline a supportive macroeconomic framework of fiscal consolidation, debt reduction and the re-prioritisation of funds, according to President Cyril Ramaphosa, but he stayed clear of mentioning any specific budget cuts. The budget will likely underpin the recovery plan outlined by Ramaphosa last week, and could prove decisive for both SAGBs and the rand. If the MTBPS avoids hiking up debt projections, this could bode well for the South African rand, as South Africa’s national debt is projected to rise to 81.8% of its GDP at the end of this year.
The afternoon will feature the Bank of Canada policy decision at 14:00 GMT, where the current policy stance is expected to remain, while the Monetary Policy Report is set to see an upgrade in the 2020 growth expectations. A separate BoC primer is included below.
The Brazilian central bank is set to keep its Selic rate unchanged at 2% on Wednesday. Since the start of the pandemic, the central bank has reduced its benchmark rate a whopping nine times, but kept the rate unchanged for the first time in September. COPOM’s main mandate remains price stability. Inflation grew at 2.44% for the TTM (trailing twelve months) in September, which was interpreted by the central bank as a sign that the economy was recovering sufficiently. Despite the overall high numbers over the summer, case count growth in Brazil has been kept relatively under control since the September meeting compared to other emerging market economies, confirming that the economy may not be in need of another push as of now.
ECB President Christine Lagarde will certainly address the worsening outlook of the euro-area economy at the press conference on Thursday, following the monetary policy decision at 12:45 GMT. A separate primer on the ECB’s meeting can be found below. Germany’s headline inflation is on the agenda on Thursday as well, after having dipped to -0.4% in September. While the dip below zero was largely because of a cut in value added taxes, the broader outlook including slow wage gains and a worsening virus situation may drag on inflation in the near future. For now, the median of forecasts submitted to Bloomberg foresees a slip of the headline inflation to -0.5% in October.
A series of data releases from the eurozone will fill the calendar on Friday morning, with inflation figures from France, Italy and Spain, and Gross Domestic Product figures from those countries as well as Germany. The figures will be released between 06:30 and 11:00 GMT. Germany enjoyed a shallower dip in GDP throughout the pandemic and managed a seemingly faster rebound in economic data than its neighbours, but the downside risk is that the current rising infections throw the recovery into reverse. Overall, the estimates of economists surveyed by Bloomberg suggest that Q3 GDP growth rates in the euro area ranged from 6.3% to 11.5%, with 9% holding the median.
BOC PREVIEW: GROWTH FORECASTS SET TO UPDATE WHILE QUESTIONS REMAIN OVER BALANCE SHEET
The Bank of Canada are set to meet at 14:00 GMT/ 10:00 EST on Wednesday 28th, where the current policy stance is set to remain but the Bank’s October Monetary Policy Report is likely to see 2020’s growth expectations upgraded. While the recent tightening of restrictions in Quebec and Ontario pose downside risks to this assumption, we believe the rebound exhibited in Q3 more than offsets the downside risks that the current second wave poses to this year’s growth forecast. This will result in the BoC’s expected -7.8% contraction for 2020, pencilled in July’s MPR, being upgraded to incorporate the positive beat in data seen during the initial stages of the recovery. However, beyond 2020 the Bank is likely to maintain its current projections for growth of 5.1% in 2021 and 3.7% in 2022 as additional fiscal proposals are yet to be ratified and thus remain out of focus for the forecasting exercise. The risks to this view are to the downside as the Bank could downgrade its growth projection for 2021 to reflect the impact a second wave has had on consumer and business confidence.
Beyond growth projections, the focus will be on the Bank’s assessment of the economic recovery as it enters the recuperation phase.
In the Q&A, questions for Governor Macklem are likely to centre on the Bank’s balance sheet, with its expansion slowing recently due to maturing purchases offsetting the minimum C$5bn government bond purchases, along with questions regarding the recent changes to key support programmes. Announced on October 15th, the BoC stated its plans to discontinue the Bankers’ Acceptance Purchase Facility (BAPF) on October 26th and the Canada Mortgage Bond Purchase Program (CMBP) sometime around next week’s meeting. In addition, Term Repo operations have become less frequent – now bi-weekly as opposed to weekly -, while the amount of Treasury bills purchased at auction has been reduced from 20% to 10%. This is in line with the current proportion purchased under the Provincial Money Market Purchase programme. With a cluster of repo purchases set to mature in the coming six months, we expect the Bank to face increasing pressure to give markets forward guidance on its balance sheet operations. However, it is likely Macklem will refrain from giving any additional guidance as the Bank awaits the next fiscal announcement, likely in November, from Finance Minister Freeland and a projection of the upcoming level of bond issuance.
The bulk of the Bank of Canada’s repo purchases are set to expire in the coming 6-months, raising questions about how accommodative the Bank’s balance sheet will be in the near future
The Bank of Canada’s balance sheet plateaus as minimum bond purchases are offset by expiring emergency provision purchases
ECB PREVIEW: NO CHANGE FOR NOW, BUT HINTS FOR DECEMBER MEETING ARE EYED
The European Central Bank meets on Thursday 29th and announces its policy decision at 12:45 GMT. Despite the recent virus developments in the eurozone, we don’t expect the ECB to change its policy just yet. During its September meeting, the central bank upwardly revised its inflation outlook for 2021, sending a somewhat optimistic message to markets. The Pandemic Emergency Purchasing Programme was not adjusted – yields in the eurozone were at a record low and the ECB had only used half of its PEPP so far. However, several things have changed since then.
The eurozone’s largest economies are grappling a resurgence in virus case count, with Spain, Italy, Germany, France, Belgium and the Netherlands all repeatedly breaking the daily record of new infections.
Renewed containment measures have been announced in all of those countries, and governments have left the option for national curfews open if current virus trends remain unchecked. ECB Policy makers have repeatedly hinted at their willingness to provide more monetary support since the September meeting, and ECB President Christine Lagarde warned in an interview that the central bank’s projections in December will look gloomier if the virus situation worsens.
At the same time, the spread between Italy’s 10-year BTP bond and the German Bund, which is a gauge of Italy’s borrowing costs and investor confidence, fell to a 1.5-year low of 121.5 last Tuesday. This suggests markets are reassured by the effectiveness of the PEPP and its flexibilities regarding the issuer limit. The narrowing sovereign spreads also reflect fading concerns that ECB may reduce its balance sheet causing monetary conditions to tighten and putting pressure on public finance in countries with higher debt levels. This is something the ECB will try to avoid at all costs, and the decreasing BTP-Bund spread indicates that markets are content with the current PEPP. Since the September meeting, the euro also escaped from its highs vs USD despite political uncertainties in the US regarding the presidential elections and the fiscal funding.
The current global and Eurozone outlook holds many uncertainties – the resurgence in virus cases disrupts euro area outlooks, the US elections are around the corner and Brexit talks are still ongoing. The ECB may want to get some of these situations out of the way before implementing new policies, increasing chances that the December meeting will include changes in monetary policy. For now, however, the communication from the ECB will be monitored closely for any hints on the next meeting.
At the current pace of PEPP purchases, the ECB can continue to buy assets under the programme until at least H2 2021
Simon Harvey, FX Market Analyst
Ima Sammani, FX Market Analyst