The message from Draghi and Ben seems to be rather similar, policy response is possible, but they have yet to convince â€œinternal skeptics of the need for immediate action.â€ The ECB has sent a message indicating that it â€œmayâ€ conduct open market operations to support the front end of the peripheral debt markets, but probably only in the context of the EFSF/ESM aid requests. The Spanish Prime Minister now suggests, after Draghiâ€™s pressure comments, that he could consider a bailout request from the fund to help ease his countryâ€™s deepening financial crisis. The ECBâ€™s forceful commitment to lower short term yields in the weaker peripheries has added to the views of a â€œgreat European firepower.â€ Spanish 2-year yields have plunged -92bps in late Friday trading and are helping to drag the EUR higher.
Below are some other highlights of the week:
- EU: FT started the speculation by declaring that they do not expect immediate market action from ECB this week and boy did they get it right!
- EC: Troika officials continue their negotiations in Greece. Thus far, it seems that Greek political leaders have agreed on most of the austerity measures demanded by its creditors and are now eyeing pension and wage cuts to find the final +EUR1.5b EURâ€™s of savings still needed.
- ECB: President Draghi was building a consensus for a plan to support Spanish bond markets.
- GBP: The UKâ€™s Lloyds Business Barometer rose to-8 in July, compared with-12 in June, boosting hopes for a recovery.
- GBP: The British Home-track housing survey reported that house prices fell for the first time in seven months, declining by -0.1% over July. On a yearly basis, it fell -0.5%, the same as in the previous month.
- CHF: The SNB Q2 FX reserves breakdown showed a slower than expected diversification trend. At the end of Q2, the SNB held almost +59.7% of its FX reserves in EUR (up from +51.3% in Q1) while the share of USD fell from +27.8% to 21.9%. Apparently the CBank is contemplating on buying more AUD. The data clearly shows that the SNB has not diversified enough in Q2 and is currently overweight EUR.
- CHF: Analysts note that given the record +CHF127b EURCHF intervention in Q2, the rise in the share of EUR is not surprising, especially as most of the intervention was in the 2H half of the quarter.
- GBP: UK PMI manufacturing fell sharply from 48.4 in June to 45.4, well below consensus set for an unchanged print. The new export index was blamed for the weakness (falling 6.7 points to 41.1); the lowest level in three years. The data suggest that UK economic activity is slowing down sharply. This is strong proof for further policy stimulus in the medium term.
- EUR: The final euro area July PMI reading was in line with consensus at 44.0. Regionally, Germany and France printed slightly below expectations at 43.0 and 43.4 respectively, whereas Greece, Spain and Italy showed signs of tentative stabilization. The main surprise was Ireland, with a 53.9 headline driven primarily by a pickup in their export component.
- GBP: UK construction PMI moved back above 50 in July, recovering to 50.9 against a 48 consensus. Analysts note that construction was the main drag on Q2 GDP and this report suggests an upside risk to the Q3 GDP numbers.
- GBP:As expected the BoE left both rates and QE unchanged at +o.5% and +375GBP respectively. The decision was not unanimous with Dale and Broadbent opposing. That leaves November as the logical time for the BoE to deliver another easing once they have a better idea of the impact of the funding for lending scheme.
- ECB: Investors had high hopes that policy makers would deliver a comprehensive solution at the ECB monetary meeting this week. Draghi managed to announce a number of measures which â€œcouldâ€ benefit European debt markets (restart its SMP program, buying the bonds of European sovereigns, implement nonstandard policy measures and address investorsâ€™ concern of the ECB holding senior claims on its government bond holdings). However, with too many questions remaining regarding specific details and implementation of these plans disappointed the market. Policy makers again have â€œunder-delivered versus expectations.â€
- EU: Euro services PMI surprised and ticked higher to 47.9 from 47.6. Germany was revised up to 50.3 from 49.7, while France was lower at 50 vs. 50.2. In the periphery, Italyâ€™s index fell to 43 from 43.1, while Spainâ€™s rose to 43.7 from 43.4. While stabilization is good news, the numbers remain too low for comfort, particularly when manufacturing PMIs are holding at recessionary levels.
- GBP: Growth in the dominant UK service sector slowed to its weakest rate in 19-months last month. The headline reading of the services PMI dropped to 51 from 51.3 in June and it strongly suggests that the British economy may struggle to recover from a recession in Q3. This is just compounding the pressure on the wisdom of the British governmentâ€™s austerity drive and its ability to cut its budget deficit.