- The past two days have marked a significant shift in rhetoric from ECB members: on Wednesday, Nowotny made the case for granting ESM a banking license, and Thursday, Draghi said that it would be within the mandate of the central bank to act towards elevated sovereign borrowing costs if these distort the monetary transmission mechanism. The latter sparked optimism that the ECB could revive its slumbering Securities Market Programme and start buying peripheral sovereign bonds again. The comments have been aiding sentiment in both the US and Asian sessions overnight. Adding to the eurozone cheer yesterday was the announcement from the Irish debt office that Ireland is returning to bond markets.
- Draghi’s comments on impact lifted EUR/USD above 1.2300 and the pair is only slightly off that level this morning, and sent Spanish and Italian rates markedly lower.US and Asian equities alike also reacted positively despite dismal Facebook earnings. However, US bond markets were seemingly less convinced that Draghi was hinting at a change in ECB attitude towards the euro debt crisis and yields actually ended the day a little higher across the curve. The ECB comments in recent days make the coming week’s ECB meeting all the more important as this could provide more details on what concrete measures the ECB is contemplating.
- Japanese data released overnight painted a weaker picture of the economy than forecast: CPI declined more than expected and retail sales were much softer in June than predicted by analysts. Japan is suffering from weaker export prospects due to the stronger yen as the boost to growth from earthquake reconstruction is now fading.
- Focus today will undoubtedly be on US Q2 GDP figures: we look for growth to be unchanged at 1.9% q/q (AR) from Q1 versus consensus of 1.5%. We expect GDP growth to print below trend until Q2 13 leaving annual growth at 2.1% in 2012 and 2.2% in 2013. A modest increase in employment growth from the current level should push the unemployment rate marginally down to 8% by the end of this year. A weaker-than-expected GDP number today would clearly add to fears of a prolonged global slump but should at the same time revive hopes of more Fed easing; hence this would not necessarily be a one-way street for risk appetite.
- Yesterday’s data out of Sweden on June trade and unemployment data added to our conviction that Q2 GDP next week will be stronger than anticipated by the Riksbank. This morning June retail sales are due for release and we expect growth to drop to 1.5 % y/y. That said, yesterday’s business and confidence indicators were quite downbeat, suggesting prospects for the Swedish economy are slowly deteriorating. In our view, Monday’s GDP data will likely take out some of the front end of the current money market curve, while the confidence numbers suggest adding to it further out. That is, we will likely see rate cut expectations being pushed out in time.
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