Equity markets were eerily calm yesterday, with the S&P sanguinely rising by 0.29%, as participants positioned for the large number of economic event risks gathering on the horizon. The ADP employment figure did little to sway markets on whether or not this would speed up the Fed’s timeline for raising their benchmark rate, but does raise confidence that Non-Farm Payrolls on Friday will come in right around the 200k mark for March. St. Louis Fed President James Bullard was on the wires advocating the first rate hike in the US would come in Q1 of 2015, slightly more bullish than the six month time frame previously laid out by chairwomen Janet Yellen. Bullard’s comments helped support the big dollar, pushing the DXY up 0.18% during the North American session. International Monetary Fund Managing Director Christine Lagarde also weighed on the global liquidity situation, warning there was an increased risk of low inflation in the Eurozone, and that the common-currency bloc needs additional monetary easing through unconventional measures. The statements came ahead of the ECB policy meeting this morning, and pushed EURUSD into the mid-1.37s.
The overnight Asian session once again saw confusing PMI readings from China, only instead of activity in the manufacturing sector it was on the services side. The government non-manufacturing PMI fell from 55.0 to 54.5 in March, while the survey conducted by HSBC rose from 51.0 to 51.9. In addition to the mixed bag of purchasing manager activity, the government released some of the particulars surrounding a mini-stimulus plan for China, which included easing criteria for small firms to apply for tax concessions and speeding up the construction of railway lines. The total funding for the 18% increase in rail lines compared to last year will come from the government selling almost $25B in bonds, so in the grand scheme of things the stimulus plan isn’t that significant, which in turn explains why the market shrugged off the news. The Shanghai Comp finished its session down by 0.74%, while the Aussie slumped into the low 0.92s against the American dollar, although most of the damage to the Antipodean currency was a consequence of a soggy retail sales print for the month of February.
The main event in Europe today was the European Central Bank’s policy meeting, after which the Governing Council announced they would leave interest rates unchanged as per market expectations. With the disinflationary pressures continuing to mount in the zone, there had been chatter of a possible cut in the deposit rate that would force banks to pay the ECB to hold funds on their behalf, but it now comes down to Mario Draghi to discuss the council’s decision, with market participants keenly watching to see if the head of the ECB will discuss the implementation of any non-conventional monetary policy tools. There was a slight knee-jerk reaction to the no change in rates, but for the most part the EUR was stable heading into Draghi’s press conference. As we go to print the Q&A period for Draghi’s press conference is just beginning, with Draghi reiterating the importance of how the level of the EUR factors into price stability, also mentioning there was a discussion within the Governing Council as to the implementation of a QE-style program. EURUSD has slipped marginally since the beginning of the press conference, although the losses have been muted with the pair changing hands in the mid-1.37s.
As we get set for the North American open, Canadian export numbers were just released, increasing at a slightly faster pace than expected in the month of February and pushing the trade balance to a surplus of $0.3B. In a welcome development for the export sector in Canada, volumes were up 2.2%, with exports to their largest trading partner rising 4.4% as Canada’s trade balance with the United States increased from $3.9B to $4.3B over the month of February. January’s trade balance was however revised lower, so that’s taken some of the wind out of the Loonie’s sails, with USDCAD essentially unchanged from yesterday, pivoting in the low 1.1000 region.
Equity futures are also chopping around the unchanged level before the opening bell, showing little reaction to Draghi’s press conference thus far. The commodity-complex is soft this morning, with front-month WTI remaining offered below $100/barrel, gold off by $5/ounce, and copper futures sliding back to the $3 handle.
The crescendo for the week in financial markets cumulates tomorrow with the Non-Farm Payroll report out of the US. Barring any large external financial shocks, it is now common knowledge the Fed’s quantitative easing program will be completed by either October or December of this year, with the markets now focusing on how the incoming economic data shapes expectations for the length of time after the Fed stops expanding its balance sheet to when it decides to raise rates. A report that shows the American economy created north of 200k jobs in March will help confirm the six-month time frame Yellen has previously laid out, erasing some of the dovish-ness from Yellen’s speech earlier in the week. We would caution that the headline number might be less of a factor moving forward, as other indicators such as average earnings and workweek hours help paint a more robust picture of how the labour market is performing.
On the Canadian side of the 49th parallel, March is expected to show a gain of 20k new jobs, which would essentially bring net employment gain to flat going back to December of last year. The Canadian employment number is notorious for being a volatile print, so there could be ample opportunity for corporates that trade the Loonie to take advantage of attractive opportunities should the print deviate substantially from expectations. A strong employment print may bring some corporates naturally short USD out of the woodwork, as a rosy month in the labour market is unlikely to change the overall narrative towards the Loonie at this point in time.
Further reading:
Draghi ups the rhetoric ante, mentions of currency – EUR/USD unable to rally
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