All eyes on ECB today
The euro is very little changed against the dollar and sterling this morning, ahead of today’s ECB meeting, trading at around $1.0740 and 86p respectively. The pound dipped briefly against the dollar yesterday morning following weak UK July GDP data but recovered during the day to be little changed at about $1.25 now.
In government bond markets, US and UK 10-year yields fell over the course of the day trading at around 4.23% (down 5bps) and 4.34% (down 7bps respectively). European yields were more or less unchanged ahead of today crucial ECB meeting with German 10-year yields steady at 2.64%.
US CPI inflation was a little firmer than anticipated in August. A pickup was expected but in the event the annual rate came in at 3.7%, up from 3.2% in July, higher than the 3.6% expectation. An increase in energy prices due to surging oil prices is behind the increase as the core rate excluding food and energy fell last month, down to 4.3% from 4.7%. Higher energy prices boosting the headline rate at this time may add to arguments for the hawks that a further interest rate increase is needed when the FOMC meets next week but in truth with core inflation still declining, not much has changed for most Fed members with release of this data.
The RICS house price balance in the UK shows a deep downturn in the market, coming in at -68 in August from -53 in July. This is the worse reading for this measure since 2009, and shows that higher interest rates are really starting to bite. The RICS said that almost every region is experiencing ‘relatively steep’ fall in house prices and respondents to the survey are predicting the slump will worsen. The RICS reported that affordability is stretched in many parts of the UK against backdrop of ‘economic uncertainty and high cost of mortgage finance’ with buyer demand and agreed sales continuing to fall.
The ECB meets today with the decision very finely balance on either to hike or hold at this point. Data is showing that activity is struggling in a number of Euro Area countries (just yesterday alone, data showed Euro Area industrial production fell 1.1% in the month of July and 2.2% in the year) with the full impact of past interest hikes yet to fully impact while on the other hand, core inflation – while slowing – is proving sticky and the ECB own quarterly forecasts (when they are published today) are still likely to show inflation running ahead of target by the end of next year. The markets see it going either way but slightly favouring a hike and we know there are number of voices in the council who will be arguing for and against so it will be a close run thing.
Other data due today includes US retail sales and PPI, but the focus will be on the ECB and President Lagarde’s press conference.