After Gorging On News, Time To Digest

Last week lived up to the hype. It was indeed a momentous week.

China joined the SDR, with a weight that puts it in third place behind the dollar and euro. The ECB did ease policy. It delivered a 10 bp cut in the deposit rate (now -30 bp), extended its asset purchase program for six months (to March 2017), broadened the range of assets that can be bought to include regional bonds, and declared intentions to reinvest maturing proceeds.

The US employment data removed what was perceived as the last potential hurdle to Fed decision to hike rates later this month. Not only was the headline number a little stronger than expected at 211k, but October jobs growth was revised to almost 300k.  

The internals were also generally favorable though the underemployment (U-6) did tick up, but is still at its lowest level since 2008, except for October. The breadth of job gains (industries) was the best in nine months. The number of people quitting their jobs stands at a four-month high, and this coupled with labor shortages reported in the Beige Book, suggest reasonably good prospects for increased wage pressure. 

A great degree of uncertainty has been removed from the markets. The BOJ balance sheet is expanding at an incredible clip of JPY80 trillion a year, and Governor Kuroda sees no compelling reasons up the ante further. In fact, due to more recent data, especially capital expenditures, Japan’s GDP, which contracted in Q3, is likely to be revised to show a little growth. The ECB reviewed its monetary policy and targets. It made its adjustments, and, barring a significant shock, is unlikely to review it again until toward mid-2016. The Bank of Canada and the Reserve Bank of Australia have recently reaffirmed their steady course. 

The Reserve Bank of New Zealand, the Swiss National Bank and the Bank of England meet in the week ahead. A Bloomberg survey found 15 of 18 economists expect the RBNZ to cut the cash rate by 25 bp, bringing it to 2.50%. The vast majority expect this to be the last cut in the cycle. We suspect there is a greater chance than suggested by the survey that the central bank stands pat. Ideas that the RBA’s neutral stance, the small move by the ECB, and increased confidence of a Fed hike, may steady the RBNZ’s hand helped spur almost a 1% rise in the New Zealand dollar before the weekend.

Draghi, Constancio, and others at the ECB blame market participants for the second largest single day rally in the euro (the first being when the US announced QE in March 2009) and the sharp backing up in interest rates. However, the Swiss National Bank was probably as surprised anyone. The sense of urgency that Draghi had seemed to have expressed and some trial balloons apparently launched, likely spurred SNB officials to prepare for the worst. What was actually delivered, and the market’s response, take pressure off the SNB from having to go further down the rabbit hole of unorthodox policy.  

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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