There was always the possibility that expectations surrounding yesterday’s ECB meeting were going to be extremely difficult to fulfil and investors paid the price of an ECB President who over promised in his recent rhetoric and under-delivered.
A deposit rate cut of 0.1% to -0.3% was always going to disappoint and the failure to expand the monthly amount only served to highlight that the ECB was scraping the barrel of top quality assets to buy.
The decision to expand the pool of assets available to buy local government debt only reinforces that perception but in reality was probably the only option available to policymakers if they wanted to stretch out the duration of the program until March 2017 to the tune of €60bn a month.
In any event the failure to meet market expectations inspired a sharp euro rebound and a global equity market sell-off, while there is the possibility that the ECB are hoping that the Federal Reserve will help finish the final part of the euro jigsaw by raising rates at their final meeting of the year in just under a fortnight.
That of course presupposes that there aren’t any nasty economic surprises in the next few days from US data which after some of this week’s data releases is not the given that most suppose it might be.
While Fed Chief Janet Yellen has suggested that she is leaning towards a rise in rates she left herself enough wriggle room to change her mind if the economic data were to deteriorate, while also stating that she didn’t necessarily require unanimity to act on rates.
This week’s US data has been disappointing with manufacturing weakening sharply to levels last seen in June 2009, and more surprisingly a weaker than expected ISM Non-manufacturing number for November as well. While inflationary pressures continue to remain soft, jobs data continues to look robust, and is likely to be enough to keep the market guessing right up to Fed decision day.
This brings us to today’s US employment report for November and could well be the final piece of the puzzle for a potential rate rise this month. This week’s ADP employment report for November showed a decent rebound to 217k after several months of below 200k readings.
Expectations are for an increase of 201k after last month’s sharp rise of 271k, with the unemployment rate set to remain at 5%, and average hourly earnings to slip back to 2.3% from 2.5%.
It would be extremely surprising to see a weak number given the amount of seasonal hiringthat normally goes on in November, last year (2014) we saw a sharp rise in hiring ahead of theThanksgiving and Christmas period with a number nearly double the previous month of 423k, but the ISM data for that month was also strong as well, which isn’t the case this time.
This begs the question as to what sort of number would sow doubts in the minds of Fed policymakers as to the wisdom of raising rates this month, and we already know that even a number in the low 100k’s probably wouldn’t do that given recent comments from St. Louis Fed President James Bullard, who is a voting member next year. This suggests we would need a number below 100k for the market to wobble in its belief of a Fed move this month.
Another factor feeding into US central bank deliberations is likely to be what is going on in Vienna and the OPEC meeting. With oil prices at multi month lows and little sign of a consensus to cut supply, further falls in the price of the black gold could well prompt further unease as to the wisdom of tightening monetary policy in the face of a commodity shock.
Currently US prices sit above their August lows of $37.50, while Brent prices are just about holding onto their multi month lows at $42. Any failure on the part of OPEC to deliver anything credible could well see further declines and exacerbate the downward pressure on inflation over the next few months.
EURUSD – after hitting a low of 1.0514 yesterday the euro rallied hard posting a key reversal day which suggests we could well be headed back towards 1.0980 on the way to 1.1120. A fall back below the 1.0720 area on the downside could well undermine this scenario.
GBPUSD &ndash after finding support at 1.4900 yesterday the pound has rebounded but needs to get back above the 1.5130 level to suggest a move back towards 1.5300. A move below 1.4880 suggests a retest of the lows at 1.4565.
EURGBP – the euro surged through the 0.7080 level spilling over to the 0.7240 level pulling back 50% of the losses from its October highs at 0.7493. While above the 0.7080 level we could well see further gains towards 0.7300.
USDJPY – currently finding support above the 122.20 area and resistance at the 124.00 area. Above the 124.00 area suggests the possibility of a move through to the August highs at 125.30. Only a move below the 121.80 area would delay the prospect of this scenario unfolding.
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