Originally published by Rivkin Securities
The euro reversed initial declines on Thursday as the ECB kept its current monetary policy unchanged. Speaking on the recent inflation figures, ECB president Mario Draghi noted that “there are no signs yet of a convincing upward trend” with the rise in the headline figure a result of the base effect for changes in oil prices. The latest readings on Wednesday showed the headline figure remained stable at 1.1% (YoY Dec) and the core measure excluding volatile items such as food and energy was also stable at 0.9% over the same period.
The Euro-zone recovery has certainly improved over the past two years, back in 2015 the ECB was fighting off deflation, employment has fallen from 11.5% to 9.8% and PMI reports signal an improving outlook and further evidence of price pressures building. However it still remains to be seen whether this is just further stabilisation or if this initial momentum can be sustained into a robust recovery.
Draghi also made it clear that the ECB was prepared to add further stimulus if it became warranted, despite already heavy opposition from German policy makers who have been critical of ultra-loose monetary policy. This will continue to be a growing theme throughout 2017 as to whether the ECB should in fact continue with asset purchases through until December 2017.Given that the Euro-zone economy effectively operates at two speeds, a single interest rate is not always suitable for all countries. Countries such as Belgium, the Netherlands and Germany for example should not warrant ultra-loose policy while countries such as Spain, Greece and Italy need the stimulus.
The euro traded +0.26% higher this morning shown on the chart below and European equity markets were flat, with both the Euro Stoxx 600 and DAX finishing -0.06% and -0.02% lower respectively. In the UK the pound gained +0.6% against the dollar and +0.36% higher against the euro, weighing on the FTSE100 which declined -0.54%.
In the US the dollar index posted modest gains, up +0.16% this morning weighing on spot gold (-0.12%) ahead of Donald Trump’s inauguration tonight. Equity markets were lower, with the Dow -0.37% weaker, as was the S&P500 and Nasdaq100 -0.36% & -0.28% respectively. There was fairly broad selling with 399 out of the 505 stocks that the S&P500 comprises of finishing trading lower.
It’s now make or break time for the “Trump Trades” which have boosted the dollar, bond yields and equities, in particularly energy, basic materials and financials. The market may give him a break for the initial stages however they will want to see legislation put forward and action being taken within his first 100 days as President.
Locally the Australian dollar was +0.68% higher as was the S&P/ASX 200, up +0.24% at 5,692.18 although we can expect a weaker start to trading with ASX SPI200 futures down 10 points in overnight trading. This followed from unemployment figures (MoM Dec) with the seasonally adjusted unemployment rate rising modestly from 5.7% to 5.8% as a result of an increase in the participation rate of +0.1% to 64.7%. Month-to-month seasonally adjusted figures can be volatile so we look at the trend figures to smooth these out, the trend unemployment rate remained unchanged at 5.7% for the ninth consecutive month and trend employment increased by 8,200.
While the headline employment figure paints a fairly positive outlook, there is still slack in the labour market. Year-on-year employment growth was 0.7%, less than have the average rate of 1.8% over the past two decades. Employment gains continue to be driven by part-time work, compared with a year earlier 120,900 part-time jobs have been added and there are 35,300 fewer full-time jobs. While this in part reflects a weakness it also reflects a shift towards a more serviced based economy away from mining investment.
Data releases:
· Chinese GDP (QoQ Q4) 1:00pm AEDT
· Chinese Industrial Production, Retail Sales and Fixed Asset Investment Ex. Rural (YoY & YTD Dec) 1:00pm AEDT
· German Producer Price Index (MoM & YoY Dec) 6:00pm AEDT
· U.K. Retail Sales (MoM & YoY Dec) 8:30pm AEDT
· Trump Inauguration 1:00am AEDT