Today of course is all about Mario Draghi but we don’t expect any firm decisions on what QE will look like in 2018 just yet. Bloomberg news yesterday reported that “The Governing Council has been presented with documents outlining multiple scenarios for adjusting QE, according to euro area officials familiar with the matter…The documents don’t identify a preferred scenario and aren’t intended as formal policy proposals, the people said, stressing that a decision doesn’t currently look likely before the Governing Council’s Oct 26th meeting.” I’ve spilled enough email ink on Draghi and the ECB this year and I’ll now leave it to him at 8:30 est before I say more. The euro is teasing with $1.20 vs the US dollar in advance. The German 10 yr bund yield at .35% compares with .25% the day before Draghi woke people up in Sintra, Portugal back in June but is well off its closing high in the weeks that followed at .60%. Bund yields are still negative out 7 years. European bank stocks, while well off their mid 2016 lows, still hate negative interest rates as the Euro STOXX bank index is still 20% below its 2015 peak.
China’s FX reserves rose for a 7th straight month to $3.092T which is the highest total since last October but was slightly below the estimate of $3.095T. Keep in mind however that much of the rise is due to valuation changes higher in the value of China’s non US currencies and recent strength in the yuan rather than outright inflows back into China. We of course have also seen an institutional crackdown on outflows, particularly the high profile blowback against some big Chinese companies and their foreign appetite for acquisitions (see Anbang and HNA). While reserves were just a bit below expectations, the onshore yuan is rallying for the 14th day in the past 16 and the offshore yuan has seen only 1 down day in the past 16. Chinese stocks though did close red. The Shanghai comp is up 8% ytd while the H shares are higher by 18%.
After yesterday’s data miss in Germany factory orders relative to the estimate, they whiffed again with its industrial production figure for July after a below forecast print in June. July IP was unchanged after a 1.1% drop in June. The estimate was up .4%. Maybe it’s the stronger euro, maybe its seasonality. The Economic Ministry said “In the summer, manufacturing couldn’t keep pace with the performance in the previous months. Indicators still suggest a continuation of the positive trend in manufacturing. But in light of orders, the pace of expansion will probably slow compared with the second half.” I said it yesterday but will again, the economic data out of Europe has gotten more mixed over the past two months. Hopefully it’s is just a temporary lull because growth this year is on track for the best in years. The print for Q2 was revised to 2.3% y/o/y today from the previous one of 2.2%. Go back to Q1 2011 to see something higher.
As expected, the Brazilian central bank cut its Selic rate by 100 bps to 8.25%. It now sits at the lowest level since July 2013 as a sharp drop in inflation has given them a lot of flexibility. This rate peaked at 14.25% in 2015. On the reform side this year Michel Temer has successfully passed two of the important three key legislative goals when he took office. The first one was limiting government spending to the rate of inflation in order to slow the excessive rises in debts and deficits. Labor market reform also passed and this is a major step in liberalizing the Brazilian labor market. Within the bill, companies would be able to more freely negotiate with employees directly instead of thru collective bargaining. Also, union members would not be forced to pay union dues which instead would be voluntary. Having the ability to more freely fire an employee for cause without major repercussions makes companies more inclined to hire which results in a net improvement in job creation. The third key piece of needed change is reform to the pension system by extending out retirement ages and signs are that Temer will be able to pass this too. I remain bullish on Brazilian stocks, bonds and the Real