Volatility Surges as Central Banking Controls the Narrative

Daily Analysis - 06/12/2015

Markets React to ECB Guidance and Look Towards Upcoming Fed Response to Economic Conditions

Trading action was largely driven by the decisions of the European Central Bank and latest employment reading from the United States as markets adjust ahead of the year end window dressing efforts and the potential for monetary policy normalization by the Federal Reserve.

Weekly Review

Developments from across the globe showed that market participants and Central Banks are eagerly awaiting the upcoming decision from the Federal Reserve after Central Banks of other advanced economies decided to leave policies mostly unchanged in light of possible developments. Both Australia and Canada left interest rates unmoved at 2.00% and 0.50% respectively while the main announcement from the European Central Bank left market participants stunned. Expectations for much more substantial action and expansion of existing monthly asset purchases were disappointed following a move to cut the deposit rate by an additional 10 basis points and extend the purchase program until 2017. A revision in the growth and inflationary outlook for the region echoed concerns that present policies were not aggressive enough to restore inflation and growth. In the United States, employment data was the most watched event with nonfarm employment figures showing the addition of 211,000 jobs in November, beating expectations of 200,000 while the prior month’s figure was revised higher to 298,000. The Euro remained elevated despite the positivity but this optimistic figure sets the stage for action from the Federal Reserve in the upcoming policy meeting.

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The Week Ahead

Chinese data will be at the epicenter of the upcoming sessions with important readings on trade and inflation in the pipeline. While the surplus is forecast to rise, exports and imports are forecast to remain in contractionary territory, adding to the potential for announcements of increased stimulus measures in the form of a reserve ratio requirement cut or further interest rate cuts. Inflation is forecast to show a modest annualized gain but this could easily miss expectations in light of deteriorating global conditions. Japanese GDP will also be released with current estimates showing an uptick in annualized growth figure to 0.10% from -0.80%. Outside of Asia, interest rate decisions are due from the Bank of England and Reserve Bank of New Zealand with the former expected to leave policy unchanged ahead of the rapidly approaching FOMC meeting while the RBNZ is expected to cut rates by another 25 basis points to 2.50%. For the data dependent Federal Reserve, retail sales and PPI figures are the main figures set to be released with retailers hoping that the kickoff of the holiday season will help boost consumption and both consumer and producer prices.

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