Rates to be kept on hold by the ECB??
The first trading day of September has started off with a bang and we can only hope that the performance in the financial markets for the rest of the year will be as strong as what we have seen yesterday. With risky assets and high yielders already trading higher following the sharp rise in Australian GDP, sentiment was further boosted by yesterday afternoon’s news that the US manufacturing sector expanded at a faster than anticipated pace in August. The ISM index rose to 56.3 from 55.5 in July, compared to expectations that it would fall back a couple of points. Of particular note was the rise in the employment sub index, which markets will take note of in anticipation of tomorrow’s non-Farm payrolls. If these also surprise on the upside then it would suggest that there may not be as large of a divergence between the recovery in the US and abroad as previously thought, and the rally in risk would be sustained. A further deterioration, however, would verify the Fed’s concern for sluggish growth over the next few months which could lead to further dollar weakness.
The Euro has extended its gains against the Dollar despite some weaker than expected German retail sales figures. The slightly stronger Eurozone PMI report and the overall improvement in risk appetite contributed to the rise along with a strong vote of confidence from the Chinese government on the importance of their links with Western Europe, and the importance of the Euro.
Today, the ECB is widely expected to keep rates on hold this month, whilst announcing that
it will extend its liquidity operations to banks beyond the September deadline. Bundesbank
President Weber earlier gave the game away by suggesting that any exit strategy would be
a matter for the first quarter of next year, rather than anytime in this. Of perhaps more
interest will be the ECB Projections for growth, which will be published during Trichet’s
press conference this afternoon. Eurozone growth forecasts could be revised considerably
higher than the current consensus of 1.2% for 2010, which could give markets some pause
to examine whether the ECB will be the first major central bank to start tightening policy
somewhere in 2011.