The Bank of Canada shocked markets overnight, slashing interest rates by 0.25% to 0.75%. In the accompanying monetary policy statement released alongside the rate announcement the Bank noted that the decision was ‘in response to the recent sharp drop in oil prices, which will be negative for growth and underlying inflation in Canada’, adding ‘weaker terms of trade will have an adverse impact on incomes and wealth, reducing domestic demand growth’. With the move completely unexpected the decision had the desired effect with the Canadian Dollar shedding more than 2% against the US Dollar in the period following the announcement. Lower commodity prices driving lower national incomes, disinflationary pressures while your currency remains stubbornly-high? Sound familiar, RBA?

The rumour mill surrounding potential sovereign QE from the European Central Bank went up a notch overnight with Bloomberg reporting that the Bank will announce a 2-year bond buying program of €50b per month later on this evening. If realised the program size would be significantly larger than what markets currently have priced.

US housing starts rebounded in December with an annual increase of 1.089m reported. The figure was higher than the upwardly-revised 1.043m pace of November and expectations for a decline to 1.04m although building permits, somewhat of a lead indicator for future housing activity, fell by 1.9% to an annual rate of 1.032m, below the 1.055m pace expected.

US mortgage applications jumped last week following a 49.1% increase in the previous corresponding week with the MBA mortgage market index rising 14.2%. A 22.3% surge in refinancing offset a 2.5% decline new mortgages with the average 30-year mortgage rate sliding by an additional 9bps to 3.80%.

UK unemployment plunged to 5.8% in November. The reading, below the 6.0% level of October and expectations for a decline to 5.9%, was the lowest level seen since July 2008. Adding to the good news average weekly earnings rose 1.7% on year in the three months to November, above the 1.4% pace of October, with earnings excluding bonuses increasing 0.2% to 1.8%. Completing the hat-trick of solid labour market data the number of persons claiming unemployment benefits fell by 29.7k in December, below the 29.6k decrease of November and ahead of forecasts for a drop of 25k, with the reading the 26th-consecutive month that a reduction has been recorded. From a year earlier unemployment has dropped from 7.2% to 5.8% with the total number of unemployed dropping by 418k. Total employment has increased by 512k with real wages growth, that adjusted for inflation, now at the highest level since May 2008. While the pace of hiring is slowing, quarterly growth was the slowest seen May 2013, there is now mounting evidence that the labour market is tightening at a faster pace than many had been expecting.

A break from recent tradition during the Bank of England’s January monetary policy meeting with members voting 9-0 in favour of keeping their key bank rate steady at 0.5%. The two hawkish dissenters from recent meetings, Weale and McCafferty, retreated from their prior view that tighter labour market conditions posed upside inflation risks with both noting that while the recent ‘sharp fall in inflation to below the 2% target was probably driven largely by temporary factors’, there was a ‘risk that low inflation might persist for longer than the temporary factors implied and concluded that this risk would be increased by an increase in Bank Rate’. While a dovish outcome, in a sign that both may reverse their calls in coming meetings, especially should wage pressures build or recent declines in energy prices abate, the minutes indicated that their vote to keep policy unchanged was ‘finely balanced’. As you would expect following the release stocks and gilts rallied while at the same time Stirling fell.


The Day Ahead (AEDT)

The ASX 200 looks set to begin today’s session where it left off yesterday with SPI futures pointing to a rise of 39pts on the open. While the index outperformed yesterday, something that hints that we may underperform today, if we follow the pattern seen offshore gains should be led by the energy, materials and utility sectors.

The AUDUSD has been pulverised overnight with the pair dropping below the .8100 level having traded above .8200 in early European trade. While I’ve read plenty of reasons already as to why the move occurred, looking at price action it’s clear that the initial selloff came around the same time the Bank of Canada rate decision came out. Clearly many are betting on a similar outcome from the RBA come February, be it rightly or wrongly. While that drove the moves overnight today will all be about the ECB rate decision later on this evening with swings in the USD, hence the AUDUSD cross-rate, likely to be impacted by movements in EUR and JPY. Support is found at .8080 and again at .8065 with resistance located at .8100, .8130 and again at .8150.

Australian new home sales data for November will be released at 11am this morning. Elsewhere in the region we’ll also receive New Zealand manufacturing PMI along with the latest monthly economic report from the Bank of Japan.

The European Central Bank will announce their January monetary policy decision at 11.45pm this evening. While no change in rates is expected all eyes will be on President Mario Draghi’s accompanying press conference at 12.30am to see whether, and by how much, the bank will implement outright sovereign bond purchases. While I’ll do further detailed analysis post event it’s clear that a program around €500b will not be enough to satisfy markets given levels of expectation and speculation heading into this event.

Data releases this evening include jobless claims, manufacturing PMI and the latest house price index from the States, manufacturing orders and public sector borrowing from the UK, industrial orders and sales, along with retail sales, from Italy, Eurozone consumer confidence and Spanish unemployment.


Market Map Jan 22 2015


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