ECB Keeps Rates Constant, 'Stands Ready to Act'
On Wednesday, Mario Draghi, President of the European Central Bank (ECB), announced that the ECB will keep its key lending rate unchanged at 1% despite hopes for a .25% cut. At the June press conference, Draghi noted that significant and increased downside tail risks are present in today's eurozone economic climate. Though he refused to state anything definitively, Draghi did not rule out interest rate cuts if conditions deteriorate further and left the door open for rates to remain constant if economic prospects improve.
Looking ahead, the ECB maintained its expectations for growth and inflation originally set forth at the March press conference despite heightened financial tensions. Specifically, the ECB anticipates a return to gradual growth and falling inflation for the eurozone in the remainder of 2012 and into 2013.
China Cuts Key Lending Rate
In response to slowing growth and resumed fears of a 'hard landing', China announced that it would cut its key one-year lending rate by 0.25% to 6.31%. Following last year's interest rate hikes, this interest rate cut is the first of its kind in China since 2008 and comes when Chinese growth in the first quarter slowed to 8.1%. Recently, Purchasing Manager Index (PMI) data for China published by HSBC and compiled by Markit has revealed that manufacturing activity in China has been successively trending downwards for seven straight months. In the May report, manufacturing activity contracted further based on a PMI reading of 48.4 (a reading above 50 indicates expansion). Financial markets had been expecting a rate cut in China for several months now as inflation pressures have eased from last year, pushing inflation to roughly 3% currently. As inflation pressures have eased, the People's Bank of China has been afforded some room to loosen monetary policy should the speed of growth be called into question.
Spain and German Bond Auctions Underscore Euro Tensions
In two closely watched bond auctions this week, Spanish and German bond yields moved in opposite directions despite exceeding their initial maximum auction targets. Spain sold EUR 1.67 billion worth of sovereign bonds at 2, 4 and 10 year maturities. Yields on Spanish 10-year government bonds rose to 6.04% up from 5.74% at a similar sale in April and yields on 4-year bonds rose from 4.32% to 5.35%. Meanwhile, Germany sold EUR 4.03 billion worth of sovereign five-year bonds at a record low yield of 0.41%. The divergent moves in the yields for longer dated sovereign debt of Spain and Germany highlight investors' increasing risk aversion with respect to the political uncertainty facing the eurozone and importance of country-specific risk in the fixed income marketplace.
US Jobless Claims Fall
Data released this week from the US Bureau of Labor Statistics showed that initial jobless claims fell by 12,000 to 377,000 for the week ending June 2. To strip out inter-week volatility, most economists look at the trend in jobless claims by using a 4-week moving average. Following this week's data release, the 4-week moving average of jobless claims rose slightly to 377,750. Sustained jobless claims reports below 400,000 tend to indicate employment growth. However, with the release of the disappointing non-farm payrolls report last week, the US labour market recovery seems to be waning.
