KEY POINTS:
- European lockdowns slam stocks
- ECB has even more reason to ease
- Bank of Japan expected to remain on hold
- Brazil’s central bank stands pat
- Little change expected in Eurozone inflation
TODAY’S NORTH AMERICAN MARKETS
Fresh European lockdowns and the hit to global risk appetite made for an unfortunate backdrop to monetary policy decisions by the Bank of Canada and Brazil’s central bank today. For a recap of what the BoC did see here. What a day on which to issue fresh forecasts that are already under pressure for revisions.
French President Emmanuel Macron announced that the country will close all external borders, non-essential retailers, restaurants and bars for a month, but not schools and other workplaces. Germany’s new measures will take effect after the weekend and won’t be quite as restrictive as restaurants, bars and leisure facilities will shut. The Bank of Japan and European Central Bank will benefit from observing the market reaction when they lay down fresh guidance tonight through tomorrow morning.
- US equities fell by about 3½% with the TSX down 2 ¾%. European markets closed before Macron spoke but ended down by 2 ½% to 4 ¼%.
- Oil prices fell by over 5%. Gold shed US$31/oz to US$1876.
- The USD gained on all major currencies except for the yen and with the Swiss franc little changed as the latter two also picked up some safe haven demand relative to other currencies.
- Sovereign curves were relatively little changed in North America while gilts richened by 1–3bps in a modest flattener move. Italian spreads over bunds widened by over 7bps in 10s.
Brazil’s central bank kept its Selic policy rate unchanged at 2% as widely expected.
OVERNIGHT MARKETS
Most of the overnight attention will be split between off-calendar covid-19 tracking risk versus anticipation ahead of the ECB as the main calendar-based form of risk.
No changes are expected from the Bank of Japan at the overnight conclusion of its two-day meeting and in Governor Kuroda’s 2:30amET press conference. With new cases under control and daily deaths ebbing, there is reduced pressure for further stimulus albeit with a mindful eye toward developments in export markets. The policy balance rate will remain at -0.1% and the 10-year JGB target should remain at 0% +/-20bps.
Eurozone inflation readings for October start to arrive around the time of the ECB’s communications. Germany’s headline inflation (9amET) is expected to remain deflationary until the end of the year due to a cut in VAT on most goods—which was introduced as part of the government’s stimulus program. German harmonized headline CPI is expected to remain at -0.4% y/y, while the equivalent Spanish measure (4amET) is expected to register -0.7% y/y.
The European Central Bank’s statement arrives at about 8:45amET followed by President Lagarde’s press conference at 9:30amET. While there is no change expected to the ECB’s policy rates, the expected increase to the Pandemic Emergency Purchase Program (PEPP) could be fast tracked to tomorrow’s announcement. At present, only €616.9 billion of the €1.35 trillion potential size of the Pandemic Emergency Purchase Programme is being utilized and spread across Eurozone members. Since its introduction in March and the expansion in June, the ECB has moved to quickly implement purchases. While the program has significant remaining capacity, the ceiling is priced by markets that may be encouraged to see it rise further and extend over a longer period. The implementation period could stretch an extra six months beyond the current guidance that purchases will be made until at least June 2021 with reinvestment “at least” to the end of 2022.”
If they were to do this, then it’s feasible that the ECB’s overall purchase programs could sum toward the €4.5 trillion range including future room over the next year (chart 1).
With the arrival of the second wave hitting sooner than expected and new cases in member states rising out of control, the economic outlook has deteriorated since the last meeting in September. Q3 Eurozone GDP arrives Friday with an expected rise of 8–10% q/q, however, increased lockdown measures inevitably threaten the continued recovery in Q4. We see this reflected in PMIs that have weakened in Europe (chart 2) while Eurozone inflation has been tumbling more than elsewhere (chart 3).
TOMORROW’S NORTH AMERICAN MARKETS
US macro releases might be generally downplayed by markets tomorrow because of rising forward-looking risks to growth.
A strong gain in Q3 GDP is expected following the Q2 contraction of 31%. Estimates range from 32% (consensus), 30% (Scotia), and 37% (Atlanta Fed’s ‘nowcast’). Growth may be hard to come by in Q4 at a modest pace.
Markets may pay more attention to initial jobless claims (8:30amET). Recall they fell by more than expected to 787k the prior week from 842k. The volatile figures will be watched for whether the trend remains pointed lower after stalling out in September. Further, it’s unclear to what extent the improvement is genuine versus a reflection of less incentive to file as the extra US$600/week expired at the end of July.
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