Boy, I’ll tell you what, if you’re a central banker and you’re going to say something in public about monetary policy, you better make sure you choose your words really fucking carefully, because this market is hyper-sensitive.
Here’s what we got from Draghi who, speaking at the ECB Forum on Central Banking in Sintra, Portugal, said he could sum up his “assessment of the outlook for inflation and for monetary policy in three messages”:
- “The first is confidence that monetary policy is effective and the transmission process will work. All the signs now point to a strengthening and broadening recovery in the euro area.”
- “Deflationary forces have been replaced by reflationary ones”
- “While there are still factors that are weighing on the path of inflation, at present they are mainly temporary factors that typically the central bank can look through”
- “However, a considerable degree of monetary accommodation is still needed for inflation dynamics to become durable and self-sustaining. So for us to be assured about the return of inflation to our objective, we need persistence in our monetary policy”
- “Finally, we need prudence. As the economy picks up we will need to be gradual when adjusting our policy parameters, so as to ensure that our stimulus accompanies the recovery amid the lingering uncertainties”
Right, so for one thing, it probably wasn’t a great idea to open with something like “I’m going to sum up what I think in three messages,” because that doesn’t leave a whole lot of room for interpretation. Draghi is a good communicator so he should know it’s better to ramble and obfuscate in the current environment.
Well, that bolded bit in the bullets about looking through “mainly temporary factors on inflation” sparked a sharp rally in the EUR and created a wave of selling from fast money in the 5-10y sector of German curve:
He also managed to tank stocks, as the Stoxx Europe 600 fell as much as 0.9%, hitting its lowest level since June 15. Autos, telecoms, and construction were among biggest losers while the banks were little changed.
Traders also saw interest to initiate new wideners in the Bund/OAT spread.
Meanwhile, the dollar touched a five-week high versus the yen as investors await a speech from Yellen. Traders were buying in the overnight session, pushing the pair to 112 at the Tokyo fix, the highest level since May 24. Traders said large buy-stops were layered above that level at 112.13.
This comes as the greenback continues to be supported by hawkish rhetoric from Fedspeakers who seem hell-bent on tightening financial conditions even if that means hiking into a deflationary backdrop.
“There is a technical tailwind supporting dollar-yen,” Kumiko Ishikawa, a currency market analyst at Sony Financial in Tokyo said overnight. “If markets can hold around the May 24 high into the New York trading hours, the currency pair could break upward depending on the outcome of data and remarks from Yellen,” she added.
Meanwhile, the yuan moved sharply higher around 2 a.m. EST in a sudden surge:
The yuan was “being helped by the Chinese central bank,” some traders who wouldn’t give their names because they
would be summarily shot aren’t authorized to speak publicly said.
We did get industrial profits data out of China overnight. Here’s the number along with Goldman’s take:
Industrial profits: +16.7% yoy in May (+2.7% month-on-month, seasonally adjusted by GS); April: +14% yoy (-7.6% mom sa vs March).
Profits of industrial companies expanded in May compared with April (after our seasonal adjustment), although in absolute level, it is still lower than March. In year-over-year terms, profit growth accelerated from April. Profit growth is mixed among major sub-industries: year-over-year growth accelerated in chemical material production, ferrous metal smelting and pressing, automobile manufacturing etc, and decelerated in agriculture and sideline food production, general equipment manufacturing and computer manufacturing etc.
Oh, and the “unexplained” late afternoon rallies on the SHCOMP continue, as both it and the CSI 300 reversed earlier declines to close green in what you can bet was “national team” intervention.
Here’s a snapshot of global equities (Yellen speaks at 1 p.m. EST, by the way):
- Nikkei up 0.4% to 20,225.09
- Topix up 0.4% to 1,619.02
- Hang Seng Index down 0.1% to 25,839.99
- Shanghai Composite up 0.2% to 3,191.20
- Sensex down 0.9% to 30,864.71
- Australia S&P/ASX 200 down 0.1% to 5,714.19
- Kospi up 0.1% to 2,391.95
- FTSE 7446.97 0.17 0%
- DAX 12724.58 -46.25 -0.36%
- CAC 5270.17 -25.58 -0.48%
- IBEX 35 10692.00 -4.60 -0.04%