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Draghi Testifies

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The data flow is front loaded this week, with some important PMI’s scheduled for release on Tuesday. High impact European and Chinese PMI’s will be out, with most other country releases set for the following week. Also expected to impact markets early in the week will be Mario Draghi’s testimony on monetary policy tonight in Brussels.

ECB President Draghi will testify before the European Parliament’s Economic and Monetary Committee tonight. The hearing usually involves an introductory statement by the President which is pre-prepared for the event, followed by a question and answer session. Given that the uptake of the first round of T-LTRO’s last week failed to meet expectations there are some lines of questioning which have the potential to generate a market reaction:

Does the low uptake from the LTRO mean that the ECB will fail to meet its balance sheet expansion target?

Will a weak T-LTRO mean an expanded ABS purchase program to offset it?

Given the small size of the ABS market, will the ECB need to work towards implementing a full scale QE program to have sufficient impact?

Was the negative deposit rate a factor in the low demand for T-LTRO funds, given that banks would be charged for holding the excess reserves until borrowers can be found?

If the above is a factor, is the negative deposit rate worth persisting with given the small and shrinking size of excess liquidity in the banking system?

Due to the already low yields in the Euro Area, would a QE type program still target yields or would it look to fight deflation through exchange rate depreciation a la Japan under Abenomics?

It is easy to come up with many such questions, however the committee may not be so bold and leave future developments in monetary policy to the next ECB Press Conference. In any case, the hearing will certainly generate some interest even if no new information is garnered.

From the PMI’s that are out this week perhaps the most interesting is the HSCB Flash Manufacturing PMI to be released on Tuesday. Economists are expecting a reading of 50.0 which indicates neither expansion nor contraction in the industry. Chinese figures are coming under greater scrutiny at the moment after some awful Industrial Production figures were posted last weekend; year on year growth in Industrial Production fell from 9.0% to 6.9%, while Fixed Asset Investment also surprised to the downside with a drop from 17.0% to 16.5%. China is also in the midst of a general housing slowdown across all major cities, showing falls month on month reminiscent of a few years ago. With the Australian dollar having sold off four and a half cents in the past month on this weak data and general US dollar strength it is clear the data flow for the AUD is currently negative. However, with a stream of negative data flow comes strong short positioning – leaving traders open to a short squeeze. This PMI figure will be one to watch, as at 50.0 a deviation either side will be likely to affect sentiment given that it indicates the difference between expansion and contraction.

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