ECB shocks the market. US payrolls look set to continue the volatility
05/Sep/2014 • Currency Updates•
Equities continue to rise on the back of low base rates and strong data across major economies. The market seems primed ahead of Non-Farm payrolls out today, with the volatility we saw yesterday from central bank releases likely to continue.
As expected the Bank of England decided to keep rates at the historical low of 0.5% where they have remained since March 2009, as well as the asset purchasing target, with the minutes being released on the 17th of this month. The strong run the UK has experienced caused the FTSE 100 to rise for a fifth consecutive day looking to break its 14 year high. Whilst strong data and investor sentiment build on the case for a rate hike, the bank is holding fast until slack in the labour market and inflation start to rise.
Cable fell to new recent lows showing a continual decline this week. We haven’t seen lows like this since Feb earlier in the year. This time it is on the back of optimism in the US recovery and concern over the Scottish referendum. Technically it looks like the pound is oversold following a closer than previously expected referendum outcome looking likely. This is not helped by Milliband seemingly breaking from the political unity shown by Westminster politicians towards each other.
Today the one year forecast for inflation is released at 09:30 with a figure of 2.6% expected.
Retail PMI for the Eurozone came out at 45.8 vs. 47.6 forecast, but did little to weaken the euro ahead of the big news of the day, namely the cut in the central banks rate. The ECB shocked the market consensus when they lowered the historical low interest rate of 0.15% to 0.5%. This drastically weakened the euro by 1.4% vs the pound and 1.9% against the dollar. Draghi’s press conference following the rate cut did nothing to appease the markets.
Furthermore the ECB announced its asset backed security programme which will likely have a drastic effect on the central banks’ balance sheet. Whilst there was no quantitative easing programme announced, it is public knowledge that there is conflict on the 24 member governing council as to the ECB’s announcement today. Our expectations are of a formal announcement by the end of 2014 on the back of revised down growth and inflation forecasts.
Eurozone GDP is released at 10:00 with markets forecasting it to remain at 0%.
Following the central bank releases from across the pond, the greenback broke 2 month highs against a basket of its most commonly traded pairs, further buoyed later in the day by another strong ISM report and a drop in continuing jobless claims.
The ISM’s Non-Manufacturing Index registered at 59.6, up from 58.7 in July, against expectations of a contraction to 57.5. Broken down, the report’s indices showed Business Activity and New Orders at 65 & 63.8% respectively, with the overall figure dragged down by its Employment Index reading at 57.1%. The report logged responses that investment, and especially business lending, was up whilst backlog orders and international orders showed continued strong growth.
This growth in exports was reflected in an unexpected narrowing of the US trade deficit, which hit a six-month low at $40.5 billion, a reduction of 0.6% on the previous month. Export growth of 0.9% was driven by American autos and petroleum sales rising significantly.
Yesterday also saw employment data providing possible clues for today’s pivotal Non-Farm payrolls figure for August. Continuing jobless claims fell to 2.464 million from 2.528, a bullish indicator for today. However this was undermined by the ADP employment change measurement showing only a 204k shift in the number of employed Americans in the month of August and initial jobless claims for the last week of August rising to 302k against a forecast of 300k. The Fed’s Powell spoke last night with particularly hawkish comments.
The market is now poised for a seventh consecutive month of 200k plus NFP figures as positive Q3 US data continues.