The Market Today

As Expected, ECB Extends QE into 2018 but Cuts Back on its Monthly Purchase Pace

by Craig Dismuke, Dudley Carter

Today’s Calendar – Jobless Claims Continue Post-Storm Normalization as Four-Week Average Falls to Two-Month Low: A relatively quiet U.S. calendar is likely to allow global investors to remain focused on the ECB’s latest policy decision (more below). Initial jobless claims for the week ended October 21 were essentially in line with expectations, rising 10k from a revised 223K (previously 222k) the week before. The four-week average continued to benefit from a return to normalcy following the hurricane distortions in the September reports. The four-week average for initial claims fell another 9k to 239.5k, the lowest result since August. Continuing claims of 1.893MM for the week ended October 14 were a touch weaker than expected but still at a more-than-forty-year low. The claims data continues to signal a healthy and tightening labor market. Released at the same time were the Census Bureau’s September data for wholesale and retail inventories; both were just below estimates and included downward revisions of 0.1% for the month of August.


At 9:00 a.m. CT, the National Association of Realtors will release September’s pending home sales results which is expected to show only a slight rebound from August but another YoY decline. A positive result could add credence to yesterday’s surprisingly strong new home sales data (more below) while a disappointing reading could cause the surge in new home sales to be interpreted with a bit more caution. At 10 a.m. CT, the Kansas City Fed is expected to report manufacturing activity was unchanged in October.


Overnight Activity – ECB Extends QE into 2018 at a Reduced Monthly Purchase Rate (Click Here): Thursday’s most important market event is expected to be the ECB’s latest monetary policy decision. Markets and economists expected the decision to include an extension of the central bank’s QE program past December at a lower monthly purchasing pace. Before the announcement global equities had mostly firmed while sovereign yield curves had flattened on lower yields. In Europe specifically, the 2- year yields in Italy and Germany were hardly changed while 10-year yields in those countries were lower by just over 1 bps. The Stoxx Europe was up 0.37% and corporate earnings continued to be a driver of activity. The Euro had strengthened but pulled back to below break-even before the announcement. At 6:45 a.m. CT, the ECB announced that it was leaving its key interest rates unchanged and, as expected, extending its QE program into 2018 at a reduced monthly rate. The current 60B Euros per month pace will continue until December. However, starting in January 2018 the ECB will reduce its monthly net purchases to 30B Euros per month and make net purchases through at least September 2018. On the dovish side of things, the ECB maintained its pledge to keep its policy interest rates low “well past” the end of QE, noted that the purchase program could be extended beyond September if inflation was not on a sustained path towards the bank’s target, and that it could be increased if the situation deteriorates. The Statement also noted that, similar to when the Fed began tapering, portfolio cash flows would continue to be reinvested currently and for an extended period past the end of net asset purchases. Despite the details of the announcement matching expectations, the markets responded dovishly. The Euro sank with longer European yields (German 10-year -3.7 bps, Italian 10-year -6.4 bps) and the Stoxx Europe 600 jumped. As always, all eyes will turn to ECB President Draghi’s currently ongoing press conference for more details on the changes and overall mindset at the ECB. The Dollar is stronger, Treasury yields are hardly changed, and U.S. equity futures are mixed.


Yesterday’s Trading Activity – Most Treasury Yields Edge Higher Despite a Pullback from Intraday Highs: Treasury yields held higher Wednesday as bond investors found themselves stuck between the push and pull of equity weakness, stronger economic data, and stretched technical levels. Treasury yields were pressured higher overnight after a surprise gain in German business confidence and better-than-expected 3Q GDP growth in the U.K. pushed European yields up. Yields added briefly to those gains after September’s durable goods orders topped estimates and included better-than-expected indications for business spending in both 3Q and 4Q. However, the upward momentum gave way before 8 a.m. CT and yields gave up almost all of their overnight increase. The 2-year yield rose 1.4 bps to 1.60% but was off of its early-morning high of 1.62%. The 10-year yield rose 1.3 bps to 2.43% after climbing to over 2.47% earlier in the day. The 3- and 5-year notes were unchanged. Equities opened weaker which seemed to offer Treasurys some support. All three major indices dropped 0.5% on the day. Also likely contributing to the reversal lower in yields were stretched technical levels that caused traders some pause. The 10-year yield had climbed as much as 17 bps since early last week to 2.47%, its highest since March.


Surge in New Home Sales Suspect in the Context of Broader Sector Weakness: New home sales skyrocketed 18.9% MoM in September thanks to double-digit gains in three of the four regions. From best to worst, sales gained 33% in the Northeast (48k annualized homes), 26% in the South (405k annualized homes), 11% in the Midwest (73k annualized homes), and 3% in the West (141k annualized homes). It was the solid performance in the heavily-weighted southern region that contributed the most. Although the new home sales data can be extremely volatile MoM, it was the biggest monthly gain since 1992 and the fastest monthly pace (annualized 667k homes) since October 2007. Not only was the September result an above-trend outlier for the new home series, it is contrary to the more cautious picture painted by most every other housing data series so far this year. Also for some prudent perspective, total sales in 3Q were still lower than 2Q – even after the September jump.

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