Three Things to Know Before Draghi's Press Conference

The main interest today is the ECB press conference. Neither the Bank of England nor the ECB are expected to act.  When the BOE does not move, it sees no need to discuss it, though minutes are later published.  The ECB does not publish minutes of its meetings (yet), but holds a press conference regardless of its action or inaction.   

Yet, barring a surprise to this consensus expectation of no action, the information set for investors is unlikely to change much.  Draghi is expected to be dovish, recognizing the downside risks to growth forecasts as the economic recovery remains weak, fragile and uneven.  He is likely to reiterate that the ECB has plenty of policy options to respond if circumstance warrant it.  Like most other ECB officials, Draghi is likely to play down the risks of deflation and may note that inflation expectations remain anchored.  

Ahead of the press conference there are three developments to note.    First, the divergent performance of the dollar, seen in the last part of 2013 continues.  This is the relative strength of the euro and sterling in contrast to the yen and dollar-bloc.   

The Australian dollar has been unable to gain much traction.  A sell into bounce psychology remains intact.  Even the larger than expected rise in November retail sales (0.7% vs 0.4% consensus) failed to stem the erosion.  The Aussie is trading at new 5-day lows.  More selling is likely to be triggered on a break of $0.8850. 

The Canadian dollar has edged out the Norwegian krone as the weakest major currency against the US dollar, losing almost 2% so far this year.   Although the Loonie is at new multi-year lows today, domestic corporate demand is expected to slow the descent in the CAD1.0850-CAD1.0900 band.  

Indeed, the euro and sterling have recouped the ground lost in the face of the stronger than expected ADP jobs estimate and the FOMC minutes.  Taken together these developments give no reason to doubt additional tapering to be announced at the next FOMC meeting at the end of the month.  

Second, also the out performance of Italy and Spain asset markets is also continuing.  The 2-year yields are now holding below 1% and the 10-year yields are slipping further below 4%.  This is a bit of a virtuous circle as the sovereign-bank link remains strong, even though greater foreign participation has been seen in recent months.  The rally in the government bonds boosts the value of the banks' holdings and the decline in yields is supportive of the nascent economic recoveries.  

Third, China reported softer than expected December inflation figures.  CPI rose 2.5% after a 3.0% increase year-over-year in November.  The consensus called for a 2.9% rise.  The key remains food prices, which eased to 4.1% from 5.9%.  Non-food prices were little changed at 1.7% (from 1.6%).  This was also picked up by the goods inflation of 2.2%, down form 2.9%, while the pace of service price increases was unchanged at 3.3%.    Separately, deflation in producer prices remained evident.  They were off 1.4% from a year ago, unchanged pace from November.  

The easing of consumer inflation should underscore that the PBOC is not in a hurry to tighten policy and indeed, money market rates continue to unwind the year-end surge.   Yet this is doing little for Chinese equities, which continue to under-perform.  The Shanghai Composite slipped another 0.8%, to bring the year-to-date decline to 4.2%.  Note that the Chinese shares that trade in Hong Kong in the Hong Kong Enterprise Index, are off over 6% already this year.