Short Note Before ECB

The US dollar is modestly higher against the major foreign currencies, but there is not much momentum as the market awaits the US data and the ECB press conference.  Well received French and Spanish auctions have helped lift peripheral bond markets and European shares are firmer, with financials also participating today.  

Market developments are modest today and there does appear to be some position adjusting ahead of the weekend elections.  Because Sarkozy, who continues to lag in the polls, did not deal a significant blow to Hollande, in last night's debate, the Socialist candidate would have to be recognized as the victor.  Polls show waning support for the Socialists and the New Democracy Party in Greece. A fragmented parliament, just as strong leadership is needed, is the likely outcome.  Germany holds a state election and the poorer the showing the of FDP, the more likely a grand coalition between the CDU/CSU and SPD next year.  

Italy holds municipal elections Sunday-Monday.  The results will be scrutinized for two reasons.  One,it will be a sort of referendum on the un-elected Monti government and two, it will signal the informal start of next year's national election.  

The UK reported a disappointing service PMI of 53.3 compared with expectations of 54.2.  In March, it stood at 55.3.  This is the lowest reading since last November.  Interestingly, the expectations component rose to 72.6 from 71.3, which is the highest since March 2010.  It follows the disappointing manufacturing PMI.  

The debate over whether the UK is in a recession or not seems like splitting hairs.  Recession has not objective meaning.  Even the US definition of recession does not use the two consecutive quarter of declining GDP.  The fact of the matter is that for more than a year now the UK economy has been broadly stagnant.  Its unorthodox monetary policy and orthodox fiscal policy is producing a bit of a draw.  With prices proving a bit sticky the economic stagnation may verge on stagflation. 

The ECB press conference is the highlight of the day.  No change in policy can be expected, but following the poor data, including the manufacturing PMIs and unemployment, the real issue is how dovish Draghi will be.  He will likely be asked about the recent jump in M3 and his endorsement last week of a growth pact.  

Keep in mind the ECB draws a clear distinction between liquidity provisions, like the bond buying program and the LTRO and monetary policy proper, which is interest rates.  It seems that the bond purchasing program (and covered bonds) is more likely than another LTRO, but the ECB won't announced a resumption of SMP, but will just do it.  

Given that rates are at record lows and the deposit rate is already at 25 bp, the bar to another rate cut seems high.  The ECB expected economic weakness in the first half of the year.  If the weakness accelerates and brings the core (read Germany) down too, the risks seems to increase for a rate cut later this year.  

The Reserve Bank of Australia delivered a 50 bp rate cut earlier this week.  Two banks have announced mortgage rate cuts, but have not passed the full 50 bp move through.  One bank cut 32 bp and the other 40 bp.  The market has is about 2/3 of the way to price in a 25 bp cut in June.  Separately Australia reported a very weak service PMI (39.6) and is the third month below the 50 boom/bust.  Weakness was widespread--finance, insurance, employment and new orders.  

China's official non-manufacturing PMI slipped to 56.1 from 58.0. The dollar has recovered from the weakness against the yuan seen earlier in the week.  The 12-month NDF market is still pricing in a outright depreciation of the yuan this year.  

Lastly US data includes the weekly initial jobless claims and the service ISM.  Both are expected to have slipped a bit.  The productivity numbers typically don't more the market, but US productivity growth has waned in recently and another soft number is likely to draw economists' attention.