The bond yields of Spain and Italy have come down drastically and both are well below 5 percent now, a very stable level that can tide those countries over as they continue to try to raise money at reasonable rates, observed Kathleen Brooks of Forex.com.
Regarding the euro, Draghi has been incredibly clever with what he has done. They don’t like the euro falling too low, so when it was slipped close to $1.20 this time a year ago, he “talked” and that kind of helped prop up the euro. Again back in February when it was at $1.37 and was too strong for the European Central Bank, he successfully talked it down and now the euro is in a kind of equilibrium at $1.32, she noted.
Asked if she agreed with other analysts that Draghi has not been successful in reviving the credit channels and transmission mechanisms that could boost commercial and consumer lending, Kathleen said lending data out from the ECB this week showed consumer lending increased in the second quarter. But it is business lending that is mired in a depression, particularly in the periphery and that has been a big worry. Draghi can’t just use his rhetoric to improve that because that’s a structural issue and it’s going to take a long time because countries like Spain got into a debt problem and it’s going to take some time, Kathleen observed.
Draghi said rates are going to stay low for an extended period of time; asked if he’s going to add to his rhetoric in the ECB-meeting scheduled next week or announce some concrete measures, Kathleen said by and large he will probably point to the pick up in data.
The composite manufacturing and services PMI data for July rose above 50 (the level that separates contraction from expansion) which could be quite enough a message from Draghi. He has managed to achieve an awful lot in the past one year without spending a penny or without increasing the balance-sheet of the ECB. The ECB’s balance-sheet is actually shrinking and he’s not going to say anything in next week’s meeting that’s going to change that, which, in turn, will help prop up the euro, she argued.
Asked if Japan’s CPI (Consumer Price Index – a measure of inflation), which rose the most in June since 2000, indicated the country finally shook off 15 years of deflation, Kathleen said it’s certainly in the reflation territory and “Abenomics” (Prime Minister Sinzo Abe’s strategy of debasing the currency) seems to be working though it is still far away from the 2 percent policy target. The CPI data for June was much stronger in a country like Japan, which basically indicates Abenomics is on the right track. However, it will take an awful amount of stimulus to get the economy to the 2 percent inflation target from the current 0.4 percent level, she noted.
Asked what will move the yen either way from the current 99 level (against the US dollar) where it has been stuck for four weeks, Kathleen said next week’s US data will be the prime mover.
Markets know what Japan is doing because it has laid out its strategy very clearly. Prime Minister Abe just had another success in the recently held elections and there’s no doubt next week’s US nonfarm payrolls data will be pivotal.
If the economy manages to add 190,000 jobs for July, it will still keep the door open for tapering though markets won’t expect any big announcement from the Fed in next week’s meeting. After his testimony in the US Congress last week, Ben Bernanke has laid the groundwork for further tapering, but not tightening (or interest rate hikes).
You can watch the video here.
Contact Ulli