It’s a tale of two central banks for markets this morning.
As attention turns towards the European Central Bank and away from the Federal Reserve, the dollar’s rally is fading, with investors on the look out for a signal on the timing of the end of stimulus spending in the eurozone.
The euro is up 0.31 per cent at $1.1825, taking it up off a five-session low it hit during the previous session and trimming its decline for 2018 to 1.5 per cent . The dollar index is easing back from a six day peak touched on Wednesday, down 0.3 per cent over the session at 93.391. That’s cut its advance for the calendar year to around 1.4 per cent.
The pattern comes after the Fed pointed to a total of four rate rises for 2018, up from previous projections of three; with three more over next year. It also lifted its forecasts for US economic growth, and implied it would tolerate inflation breaking above its target of 2 per cent.
That hawkish tilt from the US central bank gave the dollar some wings and knocked Wall Street stocks, as well as drawing investors out of US Treasuries, lifting yields on the more policy-sensitive two-year note to a 10-year high above 2.6 per cent as investors sold the debt, the fixed returns from which are erroded in real terms during periods of inflation.
The two-year yield eased back in the European morning — by 2.1 basis points to 2.5614 per cent — amid modest demand for the debt.
European stocks are slipping after declines on Wall Street and in Asia tracked the moves away from the post-crisis era of ultra loose monetary policy.
The ECB is expected to signal that its stimulus spending will end as scheduled during 2018. While that leaved it some way behind the Fed on the path to normalised interest rates, it would represent the next step along it.
As Luigi Speranza, Head of European economics at BNP Paribas points out:
While the recent slowdown in some activity data and the re-intensification of the ‘trade war’ debate have clouded the outlook somewhat, growth remains solid and evidence is building that inflation has now turned the corner
We continue to expect the ECB to deliver the first hike in mid-2019 and to take the deposit rate to zero by the end of next year.
Here is David Kelly, JPMorgan Asset Management’s chief global strataegist, on the outlook in the US:
The Fed is getting more hawkish, reflecting an economy that is humming along strongly.
This should feed through to further increases in long-term interest rates over the next year. However, by the second half of 2019 the cumulative impacts of monetary tightening along with fading fiscal stimulus should slow the economy. This may well cause the Fed to pause in what has been recently a slow but relentless pace of monetary tightening.
Participants across global markets will have to remain accustomed to reading the runes central bankers for a while yet.