ECB Announces New Policies

Daily Analysis - 04/12/2015

European Central Bank Exten Chart ds Duration of Asset Purchases and Moves to Lower Deposit Rate

Despite early misinformation leaked from the Financial Times, the Euro surged higher as regional indices tumbled following the most recent monetary policy decision. The ECB opted to keep the benchmark interest rate on hold at 0.05% whereas the deposit rate fell by 10 basis points to -0.30% and asset purchases were extended to March of 2017 with other assets added to list available for purchase.

Saudi’s Explore Output Cuts

As markets prepare for the OPEC meeting, Saudi Arabia’s Oil Minister announced that his country is willing to cut in production as long as a number of conditions are met. Saudi Arabia suggested that it is willing to slash output by 1 million barrels of oil per day if other OPEC and non-OPEC members agree to participate. Most oil producers are pressuring the OPEC leader to minimize output as they wish to raise the price of oil, but oversupply conditions continue to weigh on prices. Despite the agreements made the past year in OPEC meetings, oil output rose to 33.328 million barrels per day versus the 30 million barrels per day production quota for the cartel. After the Minister’s statement, oil prices rose with Brent reaching back above $44.00 and WTI climbing over $41.00.

UK Service Sector Growth

The United Kingdom services sector managed to grow in November, remaining well above the 50.0 expansion mark. According to the Markit PMI data, the figure printed at 55.9, beating estimates of 55.0 and October’s reading of 54.9. Strength in new businesses from the introduction of new services has raised confidence in the economy, echoed by PMI values increasing at the fastest pace in four months. Markit economists pointed out that the data from the services sector has countered the declining values apparent in the manufacturing sector, pointing to stronger economic growth. The UK economy is expected to expand 0.60% in the final months of the year, up from 0.50% in the third quarter. Such positive data will be considered in the next policy meeting by the Bank of England, with the next monetary policy decision to be announced on December 10th.

ECB Cuts The Deposit Rate

The ECB announced on Thursday that interest rates will be kept at 0.05%, the lowest since September 2014. The Governing Council cut the deposit rate by 10 basis points from -0.20% to -0.30% in an effort to stoke spending and inflation. Furthermore, the monthly asset purchase of €60 billion will be extended until March of 2017 or beyond, if that will be considered necessary. Other measures to be taken by the ECB are the reinvestment of principal payments on securities purchased, the addition of Euro-denominated marketable debt issued by regional and local government in the European Union to be included in the public sector purchase program, and continuation of the main refinancing operations. The new monetary measures imposed are a security precaution to bring back inflation to its targeted estimate of nearly 2.00%, expressed the ECB President. However, the outlook is full of risk factors as evidenced by the speech.

US Employment Ahead

Some disappointing data released by the US on Thursday might impact the Federal Reserve’s decision regarding an upcoming rate hike. Initial jobless claims in the US surprisingly rose for the week ending November 28^th. People who filed for unemployment increased to 269,000 exceeding last week’s 260,000 but not far from the forecasted value of 268,000. Services fell with PMI printing at 56.1 in November, down from estimates of 56.5. The ISM Non-manufacturing PMI also missed forecasts by a wide margin, registering at 55.9, marking a substantial decrease from Octobers 59.1,missing estimates of 58.0 due to a drop in employment and business activity while prices increased. On the other hand factory orders expanded to 1.50% in October beating estimates of 1.40% and previous values of -0.80%. Despite a strong US dollar and spending cuts in the energy sector, transportation equipment grew by 7.90%, reflecting a rise in aircraft orders