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ECB disappoints taking with it some risk appetite

Published July 26, 2019

By Rowan Murphy

Stocks dipped in Europe and the US while bond yields edged higher after the ECB refrained from cutting interest rates but stated the economic outlook is looking “worse and worse”. The general malaise in markets came despite a night of slightly better than expected US corporate earnings.

While the ECB meeting was always going to be the focus last night it has been a combination of falling iron ore prices and RBA Governor Lowe’s commentary yesterday that has led to a fresh-leg lower in the local unit. Expectations around future RBA interest rate cuts were increased and brought forward, driving a drop in Australian bond yields. The 10 Year note, in particular, fell to as low as 1.23% during local trade – below the RBA’s current cash rate and a record low. Interest rate markets are now pricing in a 100% implied probability that the RBA will cut in October.

Markets prepare for the Fed next week and the focus will be on what they will do in regards to US interest rates. The market has priced in four interest rate cuts over the course of the next 12 months. The easing cycle is more or less scheduled to commence next week, whereby markets expect that the Fed will cut interest rates for the first time in over a decade by 25 points. There remains priced marginally into markets the possibility the Fed could move by 50 points, however, as the Fed entered its black-out period this week, the chances of that outcome has diminished.

Tonight sees the US Advanced GDP released, the results aren’t expected to be positive with Q on Q growth forecast to have slowed to 1.8% from 3.1%, but as this is expected, markets should have already priced this in.