Dovish Hold By The ECB And Uptick In US Wages Will Underscore Divergence

The important events take place in the second half of the week ahead: the ECB meeting and the US employment report. A dovish hold by the ECB is the most likely outcome. US jobs growth is bound to slow from the heady 304k gain in January, but there won't be anything in it that lends credence to ideas that the world's largest economy is on the precipice of a recession.

The Brexit drama could be moving into its home stretch. In the coming days, though it is still not clear exactly when the UK and the EU may agree on a statement of intent that the Withdrawal Bill can be wrapped in to help ease concerns over the Irish backstop. Then sometime around March 12, the House of Commons will again vote on the Withdrawal Bill and with the wrapper, and lo and behold, many who voted against it before will vote in favor of it. 

Why? Prime Minister May has a new doomsday scenario that the Withdrawal Bill is the only alternative. The Labour Party has played its part by forcing Corbyn to honor a party position of supporting a second referendum, which is then the stealth cover for those who want to Remain. If the Withdrawal Bill does not secure a majority, there will be a vote the following day on leaving with no deal. Assuming that is not supported by a majority, there would be a vote the next day seeking an extension. A no-deal exit may be the worst thing, but what some might not appreciate is the total mess (yes, worse than a dog’s breakfast) if that too did not get majority backing. 

This week’s ECB meeting is key. Two outcomes are likely, and although no change in rates can be expected, both will support the characterization of a dovish hold. First, the ECB will likely commit itself to a new long-term lending facility. A targeted long-term refinancing operation (TLTRO) would allow banks to refinance before the old operation complicates their management of short-term liquidity ratios. This is no economic or financial panacea. It simply avoids a potential strain. The ECB may not provide much detail about the new facility, but the announcement effect could produce favorable price action. 

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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