The euro has plunged today after the European Central Bank (ECB) took aggressive action to stimulate growth, cutting key interest rates for the eurozone and announcing a scheme to purchase asset-backed securities. The move was largely unexpected, and takes the refi rate down by 10 basis points to 0.05%, the lowest it has ever been, while the benchmark deposit and marginal lending facilities moved further into negative territory with cuts of the same magnitude as the refi rate.
Thursday, September 4, 2014 - 00:00
While the vote at the ECB was not unanimous, negative economic developments since the last rate meeting swayed the decision, particularly declining inflation. The ECB cut its own forecasts for growth today, now projecting 0.9% growth in euro GDP for 2014 and 1.6% for next year, compares to previous estimates of 1.0% and 1.7% respectively.
‘The Governing Council sees the risks around the economic outlook on the downside,’ said ECB President Mario Draghi, who described the ECB decisions as being arrived at by a ‘comfortable majority’.
Though the stimulus measures fall short of full-blown quantitative easing, few foresaw the governing council going quite this far this soon, resulting in sharp moves lower for the euro against its peers. EUR/USD slumped below 1.3000 for the first time in over a year, dropping 1.56% to 1.2945 by early afternoon in New York, after trading as low as 1.2920 earlier in the session. The euro also fell more than 1% against the Japanese yen and 0.92% against the British pound.
News of fresh liquidity being injected into the financial system has had a positive effect on stock markets around the globe, helping US stock index benchmarks to set fresh highs today.
The Dow Jones Industrial Average powered to a new record high of 17,161.55 and was up 0.22% or 38 points at 17,116 at the time of writing. The S&P 500 index also set a new intraday record, climbing as high as 2011.17 earlier in the session. By early afternoon in New York, the blue-chip index was up 0.27% at 2006.2.
Stock market gains were also bolstered by supportive economic data. Markit’s services PMI rose to 59.5 for August from the 58.5 mid-month flash estimate, while the ISM’s non-manufacturing index (which includes the construction and mining sectors alongside the services sector) indicated accelerating growth in August with a better-than-expected reading of 59.6, advancing from July’s already upbeat level of 58.7. We have seen numerous indicators that the manufacturing sector is heating up and today’s reports seem to suggest that other sectors in the economy will also be driving GDP growth in the third quarter.
Employment data was not quite as rosy, with the ADP employment report estimating private-payroll growth as 204,000 for August, which is a slower pace than the 212,000 estimated by ADP for July. This may slightly dampen expectations ahead of tomorrow’s official government data for the employment situation, though it should be noted that ADP’s report has diverged substantially from the official BLS numbers on a number of occasions this year.
The BLS releases its employment report for August at 08.30 Eastern Time on Friday. Non-farm payroll growth of 230,000 is expected , while the unemployment rate is forecast to drop from 6.2% to 6.1%. Private payrolls are expected to grow 220,000.
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