ECB Delivers Less Support than Expected, Sending Euro Sharply Higher

December 3, 2015

ECB officials, who had strongly hinted that significant additional monetary policy relief is imminent, failed to meet the market’s expectations.  Largely in response, the dollar recorded an  overnight drop of 2.1% against the euro and 1.7% versus the Swiss franc.  Share prices in Europe are down 3.0% in France, 2.8% in Germany, 2.0% in Spain, 1.9% in Italy and Greece, 1.8% in Switzerland, and 1.6% in Great Britain.  

Stocks in the U.S. dropped another 0.5% in the first hour of trading.  Share prices in the Pacific Rim had risen 0.7% in China and 0.2% in Japan but dropped 0.9% in India, 0.8% in South Korea and 0.6% in Australia.

The 10-year U.S. Treasury and British gilt yields leaped nine and ten basis points, while bunds and JGBs are hardly changed.

West Texas Intermediate crude oil recovered 1.2% to $40.40 per barrel.

Comex gold firmed 0.2% to $1,055.75 per troy ounce.

Against some other currencies, the dollar fell 0.7% vis-a-vis sterling and 0.1% relative to the yen but rose 0.3% against the kiwi and 0.2% versus the loonie.  The yuan and Aussie dollar are steady.

There has been a second disappointment delivered from the Institute of U.S. Supply Management following Monday’s announcement of a 1.5-point drop in the manufacturing purchasing managers index and the first sub-50 reading, that being 48.6, since November 2012.  Today’s non-manufacturing PMI plunged 3.2 points to a six-month low of 55.9, contrasting with the ECB services PMI, which improved to a 3-month high of 54.2.

But today’s biggest market story is the ECB Governing Council decision.  The 19-member committee agreed to

  • Cut the deposit rate by a less-than-forecast ten basis points to negative 0.30%.
  • Extend the planned duration of quantitative easing (QE) by a half year to March 2017, with a promise to stretch the program even longer if inflation fails to accelerate as much as now assumed.
  • Widened the range of bonds to be purchased under the asset buying program to include issuance from local and regional governments.
  • Reinvest maturing bonds in the QE portfolio for as long as needed.
  • Continue the main refinancing and three-month LTROs for as long as necessary and through end-2017 at a minimum.
  • Cut projected CPI inflation by 0.1 percentage point (ppt) each to 1.0% in 2016 and 1.6% in 2017.
  • Bumped up projected 2017 GDP growth by 0.1 ppt to 1.9%, while leaving the forecast for next year at 1.7%.

The ECB Council’s bigger news involves what policymakers did not authorize.

  • The 0.5% refinancing rate and 0.30% marginal lending facility rate were not reduced.
  • The deposit rate was cut 10 bps instead of 20 bps as many analysts were predicting.
  • Most importantly, the EUR 60 billion monthly asset purchase size was not changed.  Many analysts thought the magnitude would be raised as high as EUR 80 billion.

For a third straight month, eurozone retail sales volume failed to rise in October, instead posting a 0.1% dip following a similar drop in September and no change in August.  The October level was 0.2% below the 3Q average but 2.5% higher than in October 2014.  Sales fell 0.7% in Ireland and Austria, 0.4% in Germany and 0.3% in France during October.

Euroland’s composite and service-sector purchasing manager indices each printed at a 3-month high of 54.2 in November.  The data suggest fourth-quarter GDP growth of about 0.4% in the eurozone, 0.5% in Germany, 1.0% in Ireland, 0.6% in Spain, 0.3% in Italy, but just 0.2% in France whose November composite and service-sector readings of 51.0 constituted three-month lows perhaps reflecting the Paris attacks by ISIS.

Great Britain’s services PMI rose 1.0 in November to a 4-month high of 55.9, beating forecasts of about 55.0.

Japan’s composite purchasing managers index in November of 52.3 matched October’s 2-month high, while the services index slipped 0.6 points to a 2-month low of 51.6.

China’s composite PMI rose to a 5-month high of 50.5 from October’s score of 49.9 and September’s 80-month low of 48.0.  Reading below 50 connote contraction.

The Singapore private PMI rose 2.0 points from a 6-month low in October to a 9-month high in November of 52.2.

Hong Kong’s private PMI stayed even with October’s 3-month high of 46.6.  Purchase prices fell at their fastest pace since March 2009.

Australia’s Performance of Services index dropped 0.7 points to 48.2, indicating a faster rate of contraction than in October.

India’s composite PMI slumped 2.4 points to a stagnating score of 50.2, which is a 5-month low.  The services PMI in India, 50.1, also represents a 5-month low.

Brazil’s services PMI advanced 2.5 points to an 8-month high of 45.5, which still implies a sizable pace of contraction.  The composite Brazilian PMI was 44.5, a 3-month high.

Another suffering member of the BRIC group, Russia, recorded a 2-month high of 49.8 on its services PMI and, likewise, a 2-month high composite PMI of 50.5.

South Africa’s private purchasing managers index, which is compiled by Standard Bank, printed at a sub-50 49.6 after scoring a 15-month low of 47.5 in October.

Lebanon’s private PMI dipped 0.2 points to a 15-month low in November of 46.9.

Japanese stock and bond transactions last week generated a net capital inflow of JPY 267 billion versus an inflow of JPY 303 billion in the previous week.

South Korean on-year growth in real GDP improved to 2.7% last quarter from 2.2% in the second quarter of 2015.

Australia’s trade deficit widened 37.5% on month to A$ 3.305 billion in October.  New home sales in Australia fell 3% in October on top of a 4% decline the month before.

New U.S. jobless insurance claims rose 9K last week, and the 4-week average of 269.25K was above the average of 262.75K in the  previous four weeks through October 31.  Nonetheless, such levels are historically extremely low, raising the likelihood of sub-5.0% unemployment soon.

U.S. factory orders beat expectations in October, rising 1.5% on month due to a 2.9% advance in durables along with no change in non-durable goods orders.  Overall factory orders were 5.7% lower than in October 2014, a smaller decline than posted on average over the first three quarters of the year.

San Francisco Fed President Williams reiterated hawkish remarks he has made before about wanting to raise interest rates sooner rather than later.

Janet Yellen is testifying before the Joint Economic Committee.  Her remarks continue to suggest an interest rate hike this month.  The Labor Department’s monthly labor force survey gets released Friday.  Inflation rather than jobs growth now appears to be the primary guiding force behind Fed policy.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.


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