After days of conjecture and innuendo over the ECB’s next move, once again markets walked away empty handed overnight, with little in the way of immediate action from the European Central Bank to sustain recent gains. While signalling the bank may “undertake outright open market operations of a size adequate to reach its objective,” ECB President Mario Draghi failed to provide the concrete crisis response markets expected. In short, the ECB may intervene in the secondary market, with a focus on shorter-term maturities, but only in conduction with the Europe’s rescue fund, the European Financial Stability Facility (EFSF). Any country which is a recipient of these bond purchases will be under strict conditionality, implying the need for countries such as Spain and Italy to first seek financial aid, before benefiting from ECB/EFSF joint bond market intervention. It will be “up to the countries to decide whether they need and want the help of the EFSF,” Draghi noted, while stating bond purchases would be “adequate in size and may or may not be sterilized depending on whether the ECB regards that necessary to maintain price stability.” If left unsterilized, the European Central Bank would effectively be embarking on a U.S style quantitative easing program. The finer points of Draghi’s ‘grand effort’ may not be known until the next policy meeting. As expected, the ECB left benchmark interest rates on hold at 0.75 percent, and although discussed in the policy meeting, made no indication of the likelihood of further interest rate cuts.
The Euro was the first in line to reflect market disappointment, making a brief appearance above 1.24-figure before a sharp south-bound switch in trajectory to hit lows of $US1.2133. The Aussie followed a similar path moving to highs of 105.83 US cents before succumbing to a broad sell-off with the greenback the prime beneficiary. After falling to lows of 104.35 US cents, the local unit has consolidated higher at current levels of 104.6 US cents.
Earlier in the session, construction activity in the United Kingdom is bounced back in July, with the PMI index rising to 50.9 from 48.2 in June. Forecasts called for a moderate rise to 48.7. The Bank of England kept benchmark interest rates on hold at 0.50 percent and made no adjustments to the £375bn asset purchase program.
Euro area producer prices fell to a five month low in June with the index showing a 0.5 percent drop, representing annual growth of 1.8 percent from 2.3 percent in May. An auction of Spanish debt was met with strong demand despite 10-year debt demanding the second highest yield on record. Nevertheless, markets considered this a positive result given the current state of affairs and still near 1.0 percent lower than the 7.64 percent demanded in last week’s auction.
Economic data today includes the AIG Services index, Chinese services PMI with the HSBC equivalent due for release soon after. To cap off a solid week of event risk, this evening’s U.S payroll will now take centre stage. The U.S economy will add 100,000 new jobs in July according to consensus estimates, slightly higher than the 80,000 new positions added in June. The official unemployment rate is expected to remain at 8.2 percent.