Good morning

Notwithstanding the strong performance of US equities on Wednesday and the risk-mitigating message of the Fed minutes, European markets closed lower yesterday as growth concerns prevailed over the positive technical backdrop that should come with a loose monetary policy. A notable drag for risk assets yesterday was the below expectation German trade data which signalled that Euro Area’s strongest economy is not immune to the global macro conditions and to the geopolitical struggle with Russia. German exports dropped by 5.8% in August, while earlier this week factory orders and industrial production also posted strong declines.

What is more, yesterday we saw yet again the hurdles that the heterogeneity of the European economies and of their policymakers poises for the future fiscal and monetary policies. That is, while ECB’s President advocated once again for further structural reforms and nudged local politicians to “exploit the available fiscal space”, Germany’s Finance Minister advocated for continuous fiscal discipline. The difference in opinions between the two extends to the future path of the monetary policy, with Draghi yesterday committing to “alter the size and/or the composition of our unconventional interventions, and therefore of our balance sheet, as required” and Wolfgang Schaeuble maintaining that the current situation cannot be addressed by Quantitative Easing alone “monetary policy can only accommodate, it can buy time.” In the same vein, Germany’s representative on the ECB Governing Council expressed his concerns relative to the assets purchase programmes announced by Euro Area’s central bank and warned that “ultra-loose monetary policy doesn’t come without risks”. With respect to the debate around the scope fiscal stimulus, Merkel reiterated yesterday that the government took stock of the slowing growth momentum and that it is working to identify measures for incentivising investments. However, this is not to say that Germans leaders would accept a looser fiscal stance elsewhere in Europe where other measures can be first pursued. Indeed, the German Finance Minister Wolfgang Schaeuble invited Italy and France to “implement substantial structural reforms” as in his opinion the current situation cannot be changes by “writing cheques”. Relatedly, the IMF’s Managing Director prompted authorities to boost government spending, stating that "there has been a big drop in aggregate demand. Someone has to fill that gap."

Even as the measures to be taken by political or monetary leaders remain subject to uncertainty, Draghi commented yesterday that he sees credit growth picking up early next year and that he sees inflation slowly approaching the 2% target over the longer term. Elsewhere in Europe, the Bank of England decided to keep the interest rate unchanged although some members voted for a hike.

In the US, the markets reversed their course, likely reflecting worries about growth as even Fed stressed that the US is not immune to the slowdown in other regions. Meanwhile, the bond markets took stock of the minutes’ dovish tone and pushed the government yields lower, with the shorter end of the curve marking the largest gains as these are more sensitive to changes in the key interest rate. Relatedly, Bloomberg reported that the consensus now expects the 10 year US Treasury yield to close the year at 2.7%, marginally lower than the 2.75% projected a month earlier. In the same vein, the markets yesterday ignored the unexpected decline in weekly unemployment claims. However, we continue to see some risks for higher volatility in rates as some Fed officials maintain a rather bullish discourse. The Fed’s Vice Chairman for instance said yesterday that “considerable time” could equally mean two months or one year and, referring to the forecast for the first hike, he said “it looks like the markets have it right, somewhere in the middle of the year.” Similar opinions were expressed by New York Fed President and San Francisco Fed President.

The economic calendar is rather light today but of note will be the industrial production and inflation statistics for several European countries and the speeches of ECB representatives in Washington where the G20 meeting continues.

Have a nice day!