ECB seen falling behind the Fed on growth risk

The Fed appears to be more worried than the ECB on downside risks to growth
Philip Wee, Eugene Leow07 Jun 2019
    Photo credit: AFP Photo

    FX: ECB is seen falling behind the Fed on growth risks

    The US dollar has been weighed down by Fed cut expectations. Tonight’s US monthly jobs report will be closely watched after Fed Chairman Powell opened the door for a contingent rate cut. Consensus expects US nonfarm payrolls to retreat to 175k in May from 263k in the previous month. Compared against ADP employment, which came in markedly lower at 27k, this seems a tad high. On the other hand, the employment sub-indices in the ISM surveys have been stronger in both the manufacturing and non-manufacturing sectors. Barring shocks here, the Fed will probably be patient and cut later in September, as evidenced by a more stable 10Y bond yield around 2.10%.

    The support for the USD Index (DXY) is currently located around its 200-day moving average around 96.5. The less dovish tone of the European Central Bank (ECB) at yesterday’s governing council failed to sustain the euro’s push above 1.13. The EU 10Y bond yield was uninspired by the marginal upgrades in the ECB staff forecasts and extended its decline to another record low of -0.24%. Real GDP growth for 2019 was revised up 1.2% from 1.1% three months earlier while those for CPI inflation inched up to 1.3 from 1.2%. Not surprisingly, the market has become nervous that the ECB has fallen behind the Fed in addressing growth risks.

    Rates: Fed easing bets get even more aggressive   
    Now that the Fed has opened the door for easing, market participants have become even more aggressive in betting on rate cuts. At the start of the year, an extended Fed pause was the most likely scenario after market turbulence in 4Q18. However, as China-US trade tensions escalate, the front of the curve now factors in four cuts by end-2020, 2-3 of which would be delivered this year. US data has not shown clear signs of weakening. To be sure, the ADP employment numbers (actual: 27k; consensus: 185k) are worrying and render tonight’s payrolls critical to watch. However, we should keep in mind that job numbers tend to be volatile. With the labour market already tight, job creation should slow. Jobless claims may be a better indicator of how the US economy is faring.

    The more worrying aspect lies with inflation expectations. Inflation expectations (as measured by the 10Y breakeven) fell to 1.77%, close to the bottom of its recent 1.7-2.2% trading range. Market volatility, trade war woes and the collapse in oil prices (WTI fell to USD 53/bbl from as high as USD 66 in April) are probably to blame. Headline and core inflation, which have been broadly holding up, could get dragged lower, the impact of higher tariffs notwithstanding. Clearly, while US data do not point to imminent rate cuts, forward looking indicators are painting a bleaker picture. Two Fed cuts (our base case) could well turn out to be insufficiently dovish if US data starts to weaken materially.       

    Philip Wee

    FX Strategist - G3 & Asia

    Eugene Leow

    Rates Strategist - G3 & Asia

    The information herein is published by DBS Bank Ltd and PT Bank DBS Indonesia (collectively, the “DBS Group”). It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or finan­cial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.

    DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.

    PT Bank DBS Indonesia, DBS Bank Tower, 33rd floor, Ciputra World 1, Jalan Prof. Dr. Satrio Kav 3-5, Jakarta, 12940, Indonesia. Tel: 62-21-2988-4000. Company Registration No.