The Market Today

ECB Removes Easing Bias in Forward Guidance on Asset Purchases

by Craig Dismuke, Dudley Carter


Jobless Claims Rose Last Week But Remained at a Healthy Level: A quiet U.S. calendar should leave markets focused on any developments on the tariffs front and the ECB’s latest decision on monetary policy (more below in the Overnight section). In one of the few daily U.S. releases, initial jobless claims pushed up to 231k off of an almost 50-year low of 210k from the week before. The four week average also rose slightly to 222.5k. Despite weekly initial claims rising the most since early January, the overall level remains consistent with a healthy and tightening labor market. That idea is further supported by the decline in the number of unemployed continuing to receive unemployment assistance. Continuing claims dropped to 1.870MM, the least since November and the second lowest level since 1973.


Later this morning, the Fed will release data showing how household net worth changed in the final quarter of 2017.



Yesterday – Cohn Concerns Eased as Potential “Carve Outs” from Trade Tariffs Alleviated Some Market Worry: Stocks tumbled at the open as futures trading predicted they would but finished well off the day’s lows following reports tariffs on steel and aluminum may include “carve outs” for certain countries. Stocks fluctuated in negative territory during morning trading before mounting an afternoon comeback that would ultimately leave the S&P 500 little changed on the day. The index fell a miniscule 0.05% after dropping a much steeper 1.0% earlier in the day. The Dow shed 0.33% but the Nasdaq managed to rise 0.33%, its fourth consecutive daily gain. Concerns over Gary Cohn’s resignation weighed on markets early. However, sentiment brightened a bit on comments from the White House that tariffs could be decided “country by country” and potentially exclude Canada, Mexico, and others for national security reasons. After recovering from lows reached amidst the equity selling, the Treasury curve ended less than 1 bps changed.


Overnight – ECB Removed Easing Bias in Forward Guidance on Asset Purchases: The Euro weakened, the Stoxx Europe 600 gained 0.3%, and core European sovereign yields edged higher as investors awaited the latest policy decision from the ECB. As expected, the ECB left its key rates unchanged but it was a change to forward guidance in the statement that got a rise out of the Euro. As it relates to its asset purchase program, the ECB struck a line that markets had considered to show a bias for easing: “If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the asset purchase programme (APP) in terms of size and/or duration.” The change is consistent with the belief the ECB will gradually move away from easing policy. In his early remarks, ECB President Draghi has described a stronger growth outlook but continues to see subdued inflation pressures; the ECB shaved 0.1% off its 2019 inflation forecast. Earlier in Asia, Japan’s 4Q GDP report was revised up from 0.5% annualized QoQ to 1.6% as the Bank of Japan kicked off its March policy meeting. An announcement is set for overnight. In China, the monthly trade surplus easily surpassed the small expected deficit as exports rose an eye-popping 44.5% MoM, the biggest monthly increase since February 2015. Longer Treasury yields are slightly lower after fluctuation with European yields during  the ECB’s announcement.



Bostic Has Boosted His Near-Term Outlook for Rate Increases from Two to Three: Atlanta Fed President Bostic (voter) said that fiscal stimulus in the form of tax cuts and increased government spending could cause the Fed to be more aggressive with rate hikes. He said anything from two to four hikes this year remained a possibility, but personally the prospects of a fiscal boost have caused him to upgrade his outlook from two hikes in 2018 to three. That change will add to the story that the average (and potentially median) dots could increase for 2018 and beyond when officials refresh the Dot Plot later this month. Bostic commented on recent rhetoric around trade and tariffs, saying that protectionism is a net negative for the broader economy and could pose a potential offset to benefits from tax reform and downside risks to the overall outlook for the economy and interest rates. So for now, he said he’s “really taking a wait-and-see attitude.”


Consumer Credit Slowed in January: Non-real-estate secured consumer credit expanded by $13.9B in January, much weaker than the $17.7B expected and the slowest pace in four months. The slowdown was driven by weaker activity in revolving credit, which consists primarily of credit cards. Revolving credit growth slowed from an annualized rate of 7.2% in December to just 0.8%, the weakest rate of growth since 2015. The slowdown is consistent with the weaker-than-expected retail sales data for the month and the softer trends seen in personal spending. However, as was the case with those reports, slower credit growth is unlikely to be seen as a concern and should be overshadowed by continued tightening in the labor market and cycle-high confidence when assessing the outlook for the consumer. Non-revolving credit expanded at an annualized rate of 5.6%, the same pace as December.


Fed’s Beige Book Reports Pick Up in Wages and Moderate Inflation: The March edition of the Fed’s Beige Book continued to describe the pace of activity as “modest to moderate”. But with the Fed set to gather in a couple of weeks and economic activity considered to be stable and subject to several key tailwinds this year, it was the outlook for wages and inflation that was of most interest. And both were characterized as stronger than in January. Fed contacts “observed persistent labor market tightness and brisk demand for qualified workers” and many noted “wage growth picked up to a moderate pace.” On broader inflation pressures, “Prices increased in all Districts, and most reports noted moderate inflation.” The language on wages and inflation is consistent with the confidence in recent Fedspeak that the tightened in the labor market will lift wages and help push inflation towards target.

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