ECB – Premature to draw conclusions on impact of recent developments

ECB – Premature to draw conclusions on impact of recent developments
US – Labor market is becoming tighter

ECB – Premature to draw conclusions on impact of recent developments

The impact of the recent decline of commodity prices together with the turmoil on financial markets in recent weeks was obviously the main focus of today’s ECB Governing Council meeting. The Council concluded that it would be premature to assess the impact of these events on its objectives, as it was unclear if the impact would be lasting or transitory. The events so far sufficed for the ECB staff to reduce its forecasts for GDP growth and inflation slightly downwards. The main triggers stated were the lower oil price and weaker demand from emerging markets. However, the anticipated path was not changed. Draghi stated that the data continued to point to a recovery of the two macro variables, albeit at a slower pace.

However, the downside risks have increased. The Governing Council will closely monitor all relevant incoming data. Further, the statement reiterated the ability and willingness of the Council to act by using all instruments within its mandate, putting a change to the asset purchase program on the table. In the course of a regular revision of the specifications of the ECB’s purchase program, the issue limit was revised from 25% to 33%. One of the reasons given was to increase the flexibility of the program, which in our view can be seen in the context of recent events.

The outcome of today’s meeting was broadly in line with expectations. After the events of the last weeks and the comments by ECB Chief Economist Praet only one week ago, it was quite clear that the ECB would express its concerns and signal its willingness to act with more QE if needed. Currently, we do not expect a change to the ECB’s purchasing program, as we expect the economic recovery in the Eurozone to proceed. However, the ECB could counter a decrease of inflation expectations with an extension of its asset purchases. The very low inflation rate gives the ECB room to focus more on short-term considerations.

A detailed report on our outlook for monetary policy and yield developments for the Eurozone and the US will be available on Wednesday on our homepage.

US – Labor market report gives differing indications

The indicators in the latest labor market report for August give differing signals. On one hand, non-farm payroll gains were reported at 173,000, considerably below the market’s estimate of 217,000. However, the numbers for the previous two months were revised upwards by 44,000, exactly the gap between expectations and the actual outcome of the August number. So, the disappointment that remained was the considerable slowdown of job creation from July to August. Despite this slowdown – and this should be of interest to the FOMC – the job market became tighter. The unemployment rate declined from 5.3% to 5.1% and hourly earnings growth accelerated to 0.3% m/m. Both indicators were above market expectations. In total, we see today’s numbers supporting a rate hike in September. However, the decision will be based on how FOMC members assess the impact of the recent turmoil on capital markets on the economy. We continue to give a rate hike in September a probability of 50%.