European Central Bank Announces Easing Extension

Daily Analysis - 09/12/2016

Ongoing Asset Purchases Set to Taper in April as Governing Council Reiterates Accommodative Stance

Although financial markets were widely anticipating a decision by the ECB to extend asset purchases past the March expiration of the current program, the move to reduce the amount of month purchases starting in April was greeted with some skepticism by financial markets.

ECB Announces Tapering and Extension

To the grand confusion of market participants, the European Central Bank opted to announce two new items during its latest monetary policy decision. While interest rates were left on hold, the Central Bank decided to extend the asset purchase program past the original March expiration until December of 2017. However, the December date is not firm, with the ECB hinting that the program could be extended further should conditions necessitate. Accompanying the extension was the announcement that €80 billion in monthly purchases would be tapered to €60 billion in April. Should the program fail to accomplish its objective of raising inflation, the Central Bank indicated that adjustments could be made in terms of the size of the program or its duration. The volatility that came from the decision and subsequent press conference was immense, with EURUSD falling as much as 275 pips from intraday highs before closing above 1.0600.

Chinese Consumer Prices Climb to 7-Month High

With the weaker Yuan serving as a positive backdrop for inflation, the latest data pertaining to consumer price inflation shows that the devaluation is having an impact as prices rise by the fastest pace in over half a year. The consumer price index rose by 2.30% year over year through the end of November, improving modestly over October’s 2.10% print. The gains were driven primarily by the food component of the index which increased by 4.00% during the period. Accompanying the gains in consumer prices were rising producer prices. The producer price index improved to 3.30% annualized growth after snapping nearly 4-years of deflationary prints back in September. Since the announcement, the Yuan has continued to fall against the US dollar as the PBOC struggles to fight the ongoing depreciation in the currency.

German Surplus Slips to 9-Month Low

The ongoing challenges facing global trade conditions has continued to impact the German economy as evidenced by the latest import and export figures. Exports remain in contractionary territory on an annualized basis, falling -4.10% through the 12-months ended in October. Imports fared better, falling only by -2.20% over the same period. On a monthly basis, both imports and exports rose moderately, with imports outpacing the gains in exports and causing the trade surplus to fall to the lowest point since January. According to Destatis, one of the predominant drivers of the weakness was actually trade within the European Union and Euro Area peers. This particular attribute proved to be a big component behind the steep annualized drop in trade. Before the data, the German DAX 30 was on a tear higher, rallying to the highest point since November of 2015 before pulling back slightly on the news.

Swiss Unemployment Surprisingly Climbs

In spite of one of the most accommodative environments for businesses, unemployment in the Swiss economy surprising rose during the month of November to 3.30%. Besides marking the highest rate in months, the rate could continue to rise, especially after high profile announcements of layoffs in the financial sector from giants such as Credit Suisse. Negative interest rates at record lows have helped certain aspects of the economy improve, however, deflation began to pick up again in November, with consumer prices falling at an annualized -0.30% pace through the end of the month. Growth is also stagnating, as evidenced by gross domestic product flat at 0.00% during the third quarter, bring the year over year rate of growth down to 1.30% from 2.00% prior. Although the Franc was slightly weaker after the jobless rate was announced, headwinds facing Europe could reverse those losses quickly.