This morning, rate announcements from both BOE and the ECB produced no change in policy, as was largely expected. However, market reaction to each has been somewhat different. The difference between the two decisions is that the BOE does not issue a policy statement whereas the ECB does. The minutes from the BOE meeting will be released in about two weeks time, which will give a better idea as to what they are thinking regarding future policy, and some in the market are already calling for additional stimulus to offset the declining economy.
The ECB on the other hand is dealing with an entirely different situation with the debt crisis taking center stage. Having already raised interest rates twice this year, it is doubtful that they will reduce the rate any time soon. So the markets are betting that we will see further quantitative easing from the ECB in the form of bond buying from the periphery countries in an attempt to keep yields from rising too quickly.
Trade balance figures in both Germany and France came in lower than expected, and EUR/USD looks poised to test support at 1.40.
The Aussie is also lower but has rebounded from earlier lows after the unemployment rate unexpected jumped from 5.1% to 5.3%. The Australian economy was expected to have added 10K jobs but actually saw a decrease of 9700. One of the things helping to keep the Aussie somewhat stable is that the market sees less of a chance of a rate reduction after Tuesday’s rate decision.
One place where unemployment is not an issue is in Switzerland, where they reported 2.8% unemployment, as expected. It is no surprise that the Swiss franc is desirable with those economic metrics in mind, and is one of the reasons why the SNB set the “line in the sand” at 1.20 vs. Euro.
Also taking the “wait and see” approach to interest rate policy is the Bank of Canada, who yesterday also reported no change to policy. It seems that most Central bankers around the globe see the writing on the wall for a global slowdown so they are not concerned about inflationary pressure at this point. This will also leave them with the ability to reduce in the future should their domestic economies need a shot in the arm.
Later today, the US initial jobless claims are expected to produce another 410K new unemployed and this afternoon Fed Chairman Bernanke is giving a speech that some expect may lay the groundwork for further Fed action to ease monetary policy.
Dubbed “Operation Twist”, the action may be replacing the short-term debt the Fed has been buying with longer-term debt in an attempt to lower long-term yields. Normally, investors receive more interest for locking up their money for longer durations, but it is becoming apparent that Bernanke doesn’t want anyone saving in this countries and would prefer them spending to artificially get the economy moving.
What he is failing to see is that money will find its way to other investments and that investors will “hold their noise” and continue to buy US debt despite the lack of interest. For example, gold has been moving higher throughout the morning.
Later this evening, President Obama will be giving his speech on job creation and it will be interesting to see if he has logical, practical solutions that have the ability to be passed through Congress or if this is going to more political theater that has plagued our government and created a crisis of confidence.
So the markets have started the morning with a slight bias toward risk aversion, though that could change throughout the day and ahead of tonight’s speech.
