European Bank Maintains Rates

European Bank Maintains Rates

The euro was only mildly down against the dollar following the European Central Bank’s widely-expected decision to leave its benchmark interest rates unchanged at its October monetary policy meeting.



European Bank Maintains Rates
European Bank Maintains Rates

The joint currency later plummeted when ECB President Mario Draghi signposted the possibility of further stimulus at the December meeting.

‘Concerns over growth prospects in emerging markets and possible repercussions for the economy from developments in commodity markets signal downside risks to the outlook for growth and inflation,’ said Mr Draghi at his press conference. ‘The degree of monetary-policy accommodation will need to be reviewed at our December meeting when new macroeconomic projections will be available.’ This hint of further accommodation along with the generally dovish tone of his other comments, has spurred strong speculation that we could soon see more QE from the ECB and the euro consequently weakened sharply, EUR/USD falling 1/58% to 1.1160.

At the same time as the ECB is talking about downside risks, the Fed is facing mounting evidence of a tightening labor market, at least based on claims for unemployment insurance. Initial jobless claims rose a smaller-than-expected 3000 last week to 259,000. This keeps jobless claims very close to the 40-year low touched in the week prior and sets a stretch off 33 consecutive weeks below the 300,000 mark that is generally considered to signify solid labor conditions. The Labor Department says there are no special factors to consider in today’s data, which is important as the week in question is the sample period used for the October employment situation report. The four-week moving average dipped to 263,250 from 265,250 in the previous week, and this compares very favorably to how things were looking a month ago. Payroll growth was disappointing for both August and September, but expectations will still be strong for October based on the latest numbers.

With oil mounting something of a comeback since the late-August lows, there are reasons to believe inflation data could soon be firming, and with the strength of the labor market, there might just be enough evidence in by December for the Fed to justify hiking rates. Accordingly, the dollar has gained ground against most of its commonly-traded peers, as well as that huge jump against the euro.

We also saw some cause for optimism with US housing data today. Though the Federal Housing Finance Agency (FHFA) house price index slowed in August with a gain of 0.3%, compared to July’s 0.5%, existing home sales for September were up a stronger-than-expected 4.7% at an annual rate of 5.55 million. Year-on-year sales were 8.8% higher in September and the sharp drop seen in August now looks more like a blip than an end to the upward trend we have seen so far this year.

 

As well as slamming the euro, the news that the ECB will be seriously considering more easing in December has served to boost share prices. US stock indices opened strongly and the Dow Jones, the S&P 500 and the NASDAQ 100 were all up more than 1% in early trading.


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