US Going One Way, ECB the Other

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The European Central Bank (ECB) came through on the commitment it made in October to sweeten its ongoing monetary policy stimulus program in order to spur growth and fight deflation within the common currency block. This commitment had produced the desired effect in the markets, pushing the region’s stocks higher and lowering bond yields and the exchange value of the currency. This morning’s announcement expands the central bank’s bond purchase program and cuts the ECB’s deposit rate deeper into negative territory into -0.30% from the previous -0.20%.

We will know more as the market digests Mario Draghi’s explanation of the decision and the central bank’s outlook in his press conference, but the market’s initial reaction to the announcement is underwhelming. Stocks lost ground and the common currency reversed course and started strengthening against the US dollar. The market’s initial disappointment at the incremental easing measures from the ECB are likely a reflection that market expectations had run ahead of what the central bank intended to do. Hard to tell whether the ECB did a poor job of making itself clear or markets got ahead of themselves, but communication and managing market expectations is a key job function of central bank officials.

We have central bank activity this side of the pond as well, with Janet Yellen going in front of Congress’ Joint Economic Committee for testimony. She made clear in her speech yesterday, which she will likely reiterate in front of the Congressional committee today, that they are moving towards the process of normalizing monetary policy at this month’s meeting. They held back from doing that back in September on global growth concerns, but now seem determined to move past the lift-off question by announcing a rate hike at the mid-December meeting.

Check out: America's Top Forecaster: Fed to Tighten More Than Expected in 2016

Tomorrow’s November jobs report is the only piece of remaining economic data at this stage that can have a bearing on the Fed decision. But the bar for even tomorrow’s jobs report is likely very low – the jobs report likely needs to disappoint in a big way to stop the Fed from announcing a rate hike this month.

I would have expected US stocks to respond positively to the seeming disappointment at the ECB announcement. After all, a weaker dollar relative to the Euro is positive for the US economy and stocks. But the market’s initial reaction reconfirms that the traders love monetary stimulus far more than anything else. We will see how markets react to this development over time, but the reality is that monetary authorities in the US and Europe are moving in opposite directions and this divergence has consequences for the real economies through the trade channel.

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