US: Labor market report surprises on upside

ECB - More flexibility for the implementation of asset purchases

Eurozone – 4Q 2014 growth driven by consumption, net-exports

US – Labor market report

Today’s labor market report surprised markets to the upside. Non-farm payrolls increased by 295,000, 60,000 above the market estimate. The numbers for the previous two months were revised downwards by 18,000, but overall the positive surprise remained. The unemployment rate dropped from 5.7% to 5.5%, surpassing the market expectations of 5.6%. Average hourly earnings increased by 0.1% compared to the previous month, slightly below the market estimate of 0.2%. The participation rate dropped marginally, but remained within the fluctuation bandwidth of the last months. Including today’s release, two surprisingly strong labor market reports have been released since the last FOMC meeting at the end of January. Accordingly, the chances have increased significantly that, at the upcoming meeting (March 17-18), the wording of the statement could be altered as another step towards the first rate hike, which we continue to expect in June.

ECB – More flexibility for the implementation of asset purchases

As expected this week’s meeting of the ECB council brought little news. The midterm course of monetary policy was already set in January, as monthly asset purchases in the amount of EUR 60bn were announced. Details concerning the program were issued this week. Purchases will start on March 9. A price ceiling was set at the deposit rate, which currently stands at -0.2%. Bonds below this yield will not be purchased under the program. Further, within the framework defined in January the ECB and National Central Banks (NCBs) were given more leeway concerning the implementation of the program. If the purchasable volume of marketable securities (Sovereigns, Agencies, ABS, Covered Bonds) should not suffice to accommodate the share of purchases under the ECB’s capital key, substitute purchases are foreseen. From the release it is obvious that agency bonds could be used as substitutes, we take from the context that sovereign bonds from other Eurozone countries will be eligible as well. Monthly purchases need not exactly reach the amounts calculated by the capital key, but some leeway is given in spreading the purchases. Purchases among maturities will be weighed in principle by outstanding nominal amounts.

Furthermore the quarterly ECB’s economic staff projections were released. The GDP growth forecast for 2015 was revised upwards, which was of little surprise given the better economic indicators for the Eurozone released most recently. With the oil prices at very low levels the downward revision of the 2015 inflation rate was also expected. Concerning Greece President Draghi emphasized the importance of a positive outcome of the current review of the extended support program. Crucial for the reinstatement of the waiver, allowing Greek government bonds to be accepted by the ECB as collateral despite missing the rating threshold, would be the positive assessment of the likelihood about a successful conclusion of the negotiations between Greece and its creditors by the ECB council.

Eurozone – 4Q 2014 growth driven by consumption, net-exports

This week, details of the Eurozone GDP growth for 4Q14 (+0.3% q/q) were released. Similarly to the previous quarters, consumption (+0.4% q/q) continues to be a mainstay for growth in the Eurozone. In addition, net exports delivered an equal contribution to the growth. After two disappointing quarters, investments picked up as well. Regarding the further economic development, data for industrial production for January will be in focus next week. It remains to be seen whether the current encouraging survey data (which indicates growing industrial production for 1Q15) will be confirmed. Today’s release of production data for Germany fulfilled expectations, with the figure up 0.6% compared to the previous month. In particular, the construction sector (+5.0%) contributed to this performance.