Draghi underwhelms, could Non-farm Payrolls do the same?
Mario Draghi and the European Central Banks (ECB) spent the week leading up to yesterday’s meeting building up monetary policy expectations only to under-deliver on an enormous scale. Yesterday’s Interest Rate Announcement was pre-empted by an accidentally released FT.com tweet five minutes ahead of time announcing there was no change to interest rates. This was a massive upset and the markets were in a tailspin reversing bets on the Euro value dropping and triggering market orders compounding the situation. All told the Euro increased in value by over 2.5 cents versus Sterling in the course of an hour.
Draghi actually announced a deposit rate cut of a measly 10 basis points, the lower end of what the market was expecting. The ECB opted to leave the size of its asset purchases unchanged and extend it to March 2017, only six months beyond what it had previously committed itself to. It was believed that the ECB would plan an assault on low inflation on three fronts, the deposit rate, size of purchases and duration – the central bank barely attacked on two of these fronts. These unconventional measures look positively conventional to the untrained eye and it’s likely Draghi will have to re-visit this next year.
Today all eyes look to the US Non-farm payroll (NFP) number out at 1.30pm GMT to see if there is anything to deter Yellen and the Fed from a rate hike this month. It would seem almost guaranteed that the Fed will raise rates, but the question is how fast will this be done? The strength of the NFP number could determine this. Earlier in the week ADP employment figure printed stronger than expected coming in at 217k, which could anticipate a positive outcome for today’s NFP figure. Estimates are for another 200K new jobs to be added to the economy, while unemployment is expected to level out at 5%. A better than expected reading could suggest a 0.25 basis point rise to the interest rate on the 16th December, while a weaker reading may cap the Fed to only creasing by 0.10bps and waiting till March for further action. Either way, expect more volatility today.
Within the past five trading days GBP has underperformed against the majors; the moving factor for the GBP drop is the market belief that U.K. interest rates will stay low for a long time. The GBP market is now adjusting to expectations that monetary policy may stay accommodative for longer, which should soften GBP over the short term.
Data to watch: 1.30pm US Nonfarm Payrolls, Unemployment Rate, Labour Force Participation Rate, Average Weekly Hours, Average Hourly Earnings & Trade Balance.