Financial markets reacted positively to further policy loosening from the European Central Bank (ECB), after it cut its main refinancing rate by 10 basis points to 0.05%.
By Kevin Loane
Thursday, September 4, 2014
The ECB reduced two other interest rates by the same amount: the rate on overnight deposits was cut to -0.20%, and the marginal lending facility to 0.30%. The impact on financial markets in Europe was clear: equities rose while the common currency fell. Markets in the U.S. also performed well. The S&P 500 jumped immediately after the opening bell, rising 0.13% to 2003.37, while the Dow Jones Industrial Average was up 0.16% to 17,105.73.
Against a backdrop of weak price pressure and sluggish growth, many market participants expected policymakers in Frankfurt to take action. Annual inflation across the currency bloc eased to 0.3% in August, with outright deflation in several countries. Meanwhile, PMI survey figures, released earlier this week, pointed to fairly weak activity in both the manufacturing and services sectors. Soft French data painted a particularly dire picture of the euro area’s second largest economy. In updated forecasts accompanying today’s decision, the ECB cut its forecast for GDP growth across the euro area for this year and next.
In opening remarks at a press conference following today’s announcement, Draghi said that the central bank would purchase Asset Backed Securities, starting in October, with an expected ‘sizeable’ impact on its balance sheet. The proposed intervention falls short of traditional large-scale quantitative easing programs seen in the U.K. and U.S., however, Draghi left the door open to such an intervention, noting that the ECB was ‘unanimous in its commitment to using additional unconventional instruments’ should current low levels of inflation persist. He added that the Governing Council was not in full agreement about today’s action, with a broad majority in favor, but some members wanted to do more and some wanted to do less.
Market participants sold the euro heavily following the statement. By 13:00 in Frankfurt, the euro was down almost 1% against the dollar, with EUR/USD trading at 1.3030 as it looks set to test the 1.3000 benchmark. Draghi went on record during his previous press conference to say that a divergent outlook for monetary policy in Europe and the U.S. would lead to weakness in the common currency. Since this comments, the euro has declined by over 2% against the dollar. Meanwhile sterling also strengthened against the common currency today, with GBP/USD up 0.64% to 1.2599.
Back in the U.S., the key news release was ADP’s estimate of job gains in August. The figure of 204k, released before trading opened on Wall Street, was slightly below the consensus estimate for a figure of 220k. The report came ahead of tomorrow’s ever-important official nonfarm payrolls information. The consensus estimate is currently for a 220k net gain in employment, and 0.1 percentage point decline in the unemployment. A separate report from the Bureau of Economic Analysis showed that export growth outpaced import growth, resulting in a trade deficit of $40.55 billion in July against expectations for a $42.20 billion figure.
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