Financial markets remained firm in European session as investors awaited 2 central bank meetings. The short-term bullishness has been supported by speculations of a plan to recapitalize European banks. The issue is likely the theme of this month's EU summit. Commodities rose across the board. The front-month contract for WTI crude oil soared for a second day, climbing above 80 for the first time in 4 days while the equivalent Brent crude contract also rose to a 4-day high of 103.7. Gold remained firm as the euro strengthened.
While the consensus is that the ECB will keep the main refinancing rate unchanged at 1.5% at today's meeting, there have been increasing bet of a rate cut by the end of the year. While leaving interest rates unchanged, Trichet, in his last time as the President, will likely announce to provide additional easing measures such as resuming the covered bond purchase program and reintroducing the 12-month loans for the region's banks. Floods of questions at the press conference are expected to concentrate on resolution of the sovereign debt crisis: expansion and leverage of the EFSF, recapitalization and Greece's default.
The BOE announced to increase the size of the asset purchase program by +75B pound to 275B pound as world economic growth deteriorated dramatically. The program will take 4 months to complete. According to the accompanying statement, 'vulnerabilities associated with the indebtedness of some euro-area sovereigns and banks have resulted in severe strains in bank funding markets and financial markets more generally. These tensions in the world economy threaten the UK recovery'. Despite stubbornly-high inflation, policymakers believed that 'the deterioration in the outlook has made it more likely that inflation will undershoot the 2% target in the medium-term'.
Concerning the dataflow, initially jobless claims probably climbed +20K to 411K in the week ended October 1. Ivey PMI might have edged up to 58.2 in September from 57.6 a month ago. Earlier in the day, German factory orders contracted -1.4% m/m in August after a -2.8% decline in the prior month. The market had anticipated a flat reading. UK's index of services climbed +0.9% in the 3 months ending in July, compared with the 3 months ending in June. Swiss CPI surprisingly rose to +0.5% y/y in September (consensus: +0.3%) from +0.2% in August. However, inflation remained low in the country and would trigger further intervention by the SNB should the currency (Swiss franc) appreciate too aggressively.