US – Labor Market Report reveals broad improvement

ECB to expand balance sheet by EUR 1 trillion – whatever it takes

Will Eurozone economy continue to stagnate in 3Q?

US – Labor Market Report reveals broad improvement

ECB clarified monetary policy path

At this week’s meeting of the ECB’s monetary policy council, key interest rates were left untouched and existing liquidity providing measures remained unchanged. Still, the outcome of the meeting had a significant impact on markets, as President Draghi communicated a clear target to markets concerning the ECB’s balance sheet expansion. Draghi had already mentioned the balance sheet’s size at the beginning of 2012 in the context of the balance sheet expansion, but this was seen more as a rough guideline. Now it is clear that the ECB will expand its balance sheet by EUR 1 trillion and, should this not be achieved with existing liquidity programs, additional ones will be implemented. We think that the ECB will need an additional asset purchase program, which will encompass either corporate or sovereign bonds. Such an additional asset purchase program could commence in the first quarter of next year, in our view. Summarizing, the recent meeting clarified the path of the ECB’s monetary policy going forward and significant additional liquidity is to come to the markets. Markets reacted positively to this outlook.

Will Eurozone economy continue to stagnate in 3Q?

Next week on Friday (14.11), first estimates of GDP data for 3Q are going to be published for major countries and the entire Eurozone as well. Based on leading indicators, we expect slight negative growth or a prolonged stagnation of the economy in 3Q. From industry, current data for September was published this week; hardly any positive impulses can be expected. In Germany, industry production on average declined slightly in 3Q vs. 2Q, and in France industrial production stagnated. Unfortunately, based on leading indicators, no major improvement of the economic situation in 4Q is visible yet.

US – Labor Market Report

The labor market data for October met overall market expectations. The unemployment rate fell marginally from 5.9% to 5.8%, whereas markets had expected an unchanged number. Non-farm payrolls, on the other hand, were reported weaker than market estimates. The gain amounted to 214,000 vs. the 235,000 estimated by markets. However, the previous two months were revised upwards by 31,000, more than compensating for the 'shortfall' in October. Overall, the US labor market is continuing on its recovery path. A look at more detailed data allows for an even better assessment. The unemployment aggregate, which includes, in addition to the unemployment rate, the share of marginally attached workers and parttime workers for economic reasons (i.e. involuntarily), declined 0.3pp, showing an improvement of the labor market on a broad scale, something Fed officials have continuously mentioned as decisive. Indeed, this decline was the strongest in six months. Accordingly, we see today’s release in line with our expectations of a first rate hike in March of next year.