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Good Morning: The Long & the Short of it and The Bigger Picture - 12 September 2019 - ADM ISI


Ostwald, Marc
08:41 (1 minute ago)

to Marc

- All eyes on ECB meeting, but plenty of other data and events to consider;
digesting China/US 'step backs' on trade tensions, Japan Orders & monthly
Tankan, UK RICS survey; also awaiting Turkey TCMB rate decision, US CPI,]
India CPI & Industrial Production; IEA Oil Market & USDA WASDE reports;
Italy and USA govt bond auctions

- ECB: Recent pushback by 'neutrals' imply some risk of disappointment;
Tiering and TLTRO terms rather more material than Depo rate cut or QE
volume & timing

- Turkey TCMB: another big cut expected, justified by fall in CPI, but
political and banking sector risks suggest more modest cuts for longer
might be a better tactic

- US CPI: energy to weigh on headline, though PPI components imply some
upside risks on core

- Charts/Tables: ECB & Fed rate probabilities by meeting; US Primary
dealers' net position in Treasuries; EUR/GBP & GBP/USD; WTI future

- Audio preview:



There is little doubt that the ECB meeting takes pride of place on today's calendar, but there is far more to the schedule than just the ECB. Statistically Japanese Machinery Orders & PPI are to be digested, while ahead lies Indian CPI & Industrial Production, with the US looking to CPI and weekly jobless claims. The events schedule not only has the ECB meeting, but also Turkey's TCMB which is expected to deliver another big 275 bps rate cut to a still high 17.0%; meanwhile rates are seen on hold in both Malaysia and Serbia. It will also be a big day for energy and agricultural commodities markets, with the former awaiting the IEA's monthly oil market report, which is expected to cut its 2019 global oil demand growth estimate by ca 100K bbls to 1.0 mln, and also awaiting headlines out of OPEC+ Joint Market Monitoring meeting on the sidelines of the World Energy Congress in Abu Dhabi. Agricultural commodity markets will be watching out for the USDA's monthly WASDE (World Agricultural Supply and Demand Estimates) report, where the focus will be on estimates of expected US crop output, given the very late planting due to the mid-West floods in the spring. Govt bond supply comes in the shape of 3, 7 & 30-yr Italian BTPs and the last leg of this week's US refinancing via way of $16 bln 30-year. In terms of the latter, it is worth glancing at the attached chart of US primary dealers' rather large net long position in US Treasuries.

Given the sheer volume of Brexit related noise, apologies that should say 'news' (sic) that went over the newswires yesterday, GBP actually did precious little other than dance to the tune of price action in EUR/USD, which barring any further major drama on the Brexit front will again likely be the case today (my ECB preview is below the UK press digest). So in terms of levels, the story has not changed that much since yesterday, GBP will continue to chop around over the next few weeks within the 1.20/24 range that has been in place since the end of July. As the EUR/GBP chart highlights, the big support level is around 0.8910/20, with a break seemingly opening up 0.8800.... However as the risk is that the ECB will not deliver as big a policy easing package as many in markets are expecting, that key support may well hold, with upside levels at 0.9010/20 & 0.9075.

** Turkey - TCMB rate decision **
- With President Erdogan once again piling on the pressure on the Turkish central bank for another aggressive rate cut, while FX markets warily cast an eye over the risks for US sanctions due to the purchase of the Russian S400 missile system, the TCMB faces a familiar set of risks. Last month's aggressive move was easily justified on the basis of rates being much too high in 'real' terms, above all after a steep fall in headline CPI and to a lesser extent core in July, the case is not quite as strong this month - though both headline and core both fell quite sharply and more than forecast to 15.0% y/y (from 16.7%) headline and above all core to 13.6% y/y from 16.2%. Political risks nevertheless remain high, and the issue of finding a solution to the escalating NPL problem at local banks continues to be a major challenge. The judgement call for the TCMB is whether it would be better to preserve some ammunition to allow a steady but slower pace of rate cuts over the rest of the year, or kowtow to political pressure, with another aggressive move. The performance of the TRY over the week would suggest that some caution is advised, given that the TRY is trading close to the weakest levels seen in August vs the USD, and the potential for a 'risk off' reaction were the ECB 'package' to be seen as a disappointment.

** Eurozone - ECB council meeting **
- While the backdrop in growth and inflation terms is clearly much weaker in the Eurozone than the U.S.A., which will doubtless see some cuts in the fresh set of Staff forecasts to be presented today, the ECB faces a similar set of dilemmas to the Fed. It would be easy to castigate both central banks for their market expectations management in recent months, but in both cases the nub of the problem is that both policy committees are quite deeply divided on the need and the efficacy of easing policy, though the Fed at least has some interest rate ammunition, even if the economic case (beyond some insurance) for Fed easing remains debatable. As with NY Fed's Williams faux pas ahead of the last FOMC meeting about aggressive easing, the ECB is lumbered with the Olli Rehn assertion a few weeks ago that the ECB would more than match market expectations with the package that it delivers today. However leaving aside the obvious resistance of the coterie of familiar 'northern' hawks (Weidmann, Lautenschlaeger, Mersch, Knot, Holzmann & Mueller), the likes of BOF governor Villeroy de Galhau and alSo other normally more 'dovish; leaning governors such as Wunsch, Makhlouf, Rimsevics & Vasle have also cast doubt on the need to restart QE, and some have recently tried to push back on market expectations for an aggressive easing 'package. The market consensus on QE (sovereign & corporate) is EUR 30 Bln per month for a year, but estimates range from EUR 20 to 50 Bln, and it is expected that there will be a hike in the maximum limit of individual ECB holdings to 50%. A 10 bps Deposit Rate cut is also seen, though a minority are hoping for 20 bps, and some form of tiering is anticipated by all. The depo rate cut and the QE size (potentially a decision may be postponed on the start date, according to some 'sources') will be the things that markets focus on in reaction terms, even if tiering measures and an expected cut to the indexed rate spread over the Refi rate for the TLTRO III operations (seen at zero from +10 bps) should in fact be more important. In respect of tiering, there are complications given the lack of banking union, and the differing deposit volumes on a country by country basis. But the benchmarks for comparison are simple: at the current juncture, ca 95% of bank reserve deposits at the ECB attract negative rates, the situation is marginally better in Denmark where 86% are on negative rates, while the Riskbank's various 'neutralizing' operations ensure that only 1% of bank deposits are held at the central bank. In Switzerland the SNB has a two-tier policy where only bank deposits in excess of 20x the SNB's minimum reserve requirement attract negative rates, and in Japan just 5% of bank deposits at the BoJ are on negative rates. On balance, the risk is that what in effect will be Draghi's 'parting (policy) shot' as ECB president will be to 'under-deliver' on a policy package. There is little doubt that whatever is cobbled together, the message at the press conference will above all emphasize the need for fiscal stimulus to be delivered where there is room for manoeuvre, as well as for structural reforms, but as has already been witnessed at this week's German 2020 budget debate, this call will fall on deaf and intransigent ears, as has been the case since Duisenberg first called for them 20 years ago. As such the bigger risk is that markets have to face the reality that central banks have little in the way of policy ammunition, and that their best hope for an improvement to global growth prospects is for a ceasefire and a more protracted truce in global trade tensions, above all between the US and China.

** U.S.A. - August CPI **
- Following on from a not threatening, but nevertheless higher than expected set of PPI readings, the focus turns to CPI, for which the PPI data hints at some upside risks, given that the consumer related Services components were the element (rather than Trade Services) which accounted for the upside miss relative to forecasts. Notably there were pressures in PPI for hotel accommodation, apparel retailing, gaming and insurance, and in some fuels and lubricants, though headline food and energy categories were a clear drag on PPI. The consensus forecasts for CPI are very unsurprising with falling gasoline prices seen restraining headline CPI to a rise of just 0.1% m/m for an unchanged 1.8% y/y, with core CPI seen up the usual 0.2% m/m to edge the y/y rate up to 2.3% from 2.2%. Eminently an upside or downside miss would almost certainly be modest and of little relevance to the FOMC decision next week, and in market reaction terms be primarily a function of how it plays into, or against, reaction to the ECB 'package'.

========================== ** THE DAY AHEAD ** ===========================
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