- ECB expected to leave policy unchanged as it waits to gauge second-half economic recovery
- U.S. unemployment claims expected to remain high
- U.S. PPI expected to remain depressed
- 30-year T-bond auction
ECB expected to leave policy unchanged as it waits to gauge second-half economic recovery — The markets are expecting the ECB at its meeting today to leave its key policy variables unchanged. The ECB in June just recently expanded its Pandemic Emergency Purchase Program (PEPP) by 600 billion euros to 1.350 trillion euros and extended the purchases through June 30, 2021. That program is in addition to the ECB’s pre-existing Asset Purchase Program (APP) of 20 billion euros per month.
The ECB has now increased its balance sheet by a massive 1.75 trillion euros (+37%) from the pre-pandemic level seen in February, bringing it to a record 6.44 trillion euros. While impressive, the ECB’s balance sheet hike of $2.09 trillion (1.75 trillion euros) is still substantially less than the Fed’s +$3.6 trillion (88%) hike in its balance sheet. However, since the ECB’s balance sheet started out the pandemic at a higher level, the ECB’s current balance sheet level of 6.4 trillion euros ($7.7 trillion) is higher than the Fed’s level of about $7.0 trillion.
The ECB today is expected to leave its key rates unchanged, with its deposit rate at -0.50% and its main refinancing rate at zero. The markets are not expecting an ECB rate hike for at least several more years.
The ECB is waiting to see how well the Eurozone economy recovers in the second half of 2020 after the plunge in the first half. Eurozone GDP in the first half plunged by -15.5% on a peak-to-trough basis, which was much worse than the comparable -10.4% decline in U.S. GDP. The consensus is for Eurozone GDP to recover by a total of +10.9% in the second half, but the consensus is still for overall 2020 GDP growth to fall sharply by -8.1%. The market is then expecting GDP growth of only +5.7% in 2021, which means GDP in 2021 will still not be able to recover the 2020 loss.
The ECB is at least receiving some help from fiscal policy after the EU in July agreed on a 750 billion euro rescue program. That program will allow the European Commission to sell debt to raise cash for the program. The program also allows for grants to countries that were especially hard-hit by the pandemic such as Italy, which is critical because Italy’s debt load is already so high that its bond market could collapse if Italy tries to run up its national debt much farther.
The ECB will be under pressure in coming months to match the Fed’s recent move to adopt a flexible average inflation target of 2.0%. The ECB, by contrast, has a lower inflation target of “near but slightly below 2%.” Also, the ECB has not stated as unequivocally as the Fed has that it will tolerate above-target inflation in order to symmetrically hit its inflation target.
The ECB is facing much weaker inflation figures than the United States. The Eurozone CPI in August fell to a 5-1/2 year low of -0.2% y/y, and the core CPI fell to a record low of +0.4% y/y (data since 1991). The U.S. CPI in July, by contrast, was much higher at +1.0% y/y (headline) and +1.6% y/y (core). The ECB clearly has much more work to do than the Fed to boost inflation to its target.
U.S. unemployment claims expected to remain high — The U.S. labor market has improved in recent weeks, but still has a very long way to go before normalizing. The initial claims series is currently 664,000 above the pre-pandemic level seen in February, and the continuing claims series is 11.555 million above the pre-pandemic level.
The consensus is for today’s initial unemployment claims report to show a .decline of -31,000 to 850,000 following last week’s -130,000 decline to 881,000. Meanwhile, today’s continuing claims report is expected to show a decline of -350,000 to 12.904 million following last week’s -1.238 million decline to 13.254 million.
U.S. PPI expected to remain depressed — The consensus is for today’s Aug final-demand PPI to be up +0.2% m/m from July and on a year-on-year basis down -0.3% y/y. The Aug core PPI is expected to show a small +0.2% m/m and +0.3% y/y rise after the July report of +0.5% m/m and +0.3% y/y.
The headline final-demand PPI fell to a 5-year low of -1.2% y/y in April due to the pandemic, but then recovered to -0.4% y/y by July due to the recovery in crude oil and other commodity prices. Meanwhile, the core PPI fell to +0.1% y/y in June, which was the lowest level in more than 10 years, and then recovered slightly to +0.3% y/y by July.
The PPI statistics are likely to strengthen in coming months as the U.S. economy recovers. Prior to the pandemic, the headline PPI in January was at +2.1% y/y and the core PPI was at +1.7% y/y.
30-year T-bond auction — The Treasury today will sell $23 billion of 30-year T-bonds, thus concluding this week’s coupon package. Today’s 30-year bond auction will be the first of two reopenings of the 1-3/4% 30-year bond of August 2050 that the Treasury first sold in August. The $23 billion size of today’s 30-year auction is up sharply from the Treasury’s last 30-year bond reopenings of $19 billion sold in June and July.
The 12-auction averages for the 30-year are as follows: 2.34 bid cover ratio, $7 million in non-competitive bids, 5.9 bp tail to the median yield, 73.9 bp tail to the low yield, and 45% taken at the high yield. The 30-year is of average popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 63.4% of the last twelve 30-year bond auctions, which exactly matches the median for all recent Treasury coupon auctions.