After the liquidation that hit equities and currencies, emerging markets on Tuesday and following a rocky Thursday when the European Central Bank left rates unchanged while Draghi drove the euro to the highest level we have seen in over a week, the week ended on a quiet tone.
The inaction of the ECB council on Thursday has caused more uncertainties coming into next month meeting with many investors were disappointed by the status quo of the bank and the lack of a surprise drop in interest rates in Europe. Draghi refused to signal a clear commitment mentioning the council would await the new ECB staff projection for the year 2016. It seems that the ECB council is deeply divided, with Germany’s two members resisting any move that brings the ECB closer to quantitative easing.
On the other side of the world, emerging markets remain cautious and the absence of any further shocks has seen global risk appetite recover slightly after the drop on Tuesday. Indeed, we had a break in the emerging markets sell off as most currencies rebounded somewhat by the weekend.
In the US, the disappointing employment report fuelled investors’ expectations that the Fed would stop tapering its asset purchases programme, thus sending equity markets higher on Friday’s close. Federal Reserve’s Fisher attempted to calm markets by arguing that the job data was significantly affected by the bad weather in the US in January.
On the foreign exchange side, markets closed the week with a stronger sterling pound. Employment news out of the US pushed the dollar lower while a short squeeze pushed pound and dollar higher. After reaching a low of 1.6252 on Tuesday, the pound ended the week at 1.6411. Euro, on the other side, behaved in a more bullish manner. After dropping to a low of 1.3477 going into the ECB meeting, the currency closed the week at 1.3634.
In the commodity complex, gold continued its attempt to climb reaching a high of $1,275 after the release of slightly lower ADP than expected and a more disappointing employment report. The change in unemployment rate to 6.6 percent accompanied with a lower participation rate on Friday reinforced the move causing the metal to close the week at $1,266.
The US economy added just 113,000 new jobs in January, according to figures released on Friday, fuelling fears that the recovery in the jobs market appeared to have stalled. Expectations were for the economy to add around 180,000 jobs. This is the second month of disappointing jobs news, which last month surprised investors as the number was just 74,000 jobs in December, well below the 200,000 markets had been expecting.
We, however, should keep in mind that non-farm payrolls have averaged gains of 187,000 per month. Even if we have another weak reading in February, that average monthly gain is likely to remain above 170,000.
The hurdle to a “non-taper” remains very high and would likely need to be evident in weaker monthly job reading that extend past February.
In a speech given in Florida, Boston Fed’s Eric Rosengren, a dovish non-FOMC voter, said that the Fed should be “quite patient” in removing stimulus. Too much labour market slack along with very low inflation calls for highly accommodative policy. As labour markets were far from conditions that warrant raising rates, he added that the Fed’s goal was to avoid repeating Japan mistakes over deflation. He reiterated the need to see inflation rate closer to two percent. However, he said Fed tapering was possible because the economy was improving at home.
Finally yet importantly, he argued that monetary policy would not have to be as accommodative if fiscal policy was so, as the Fed wanted a more normal balance sheet when that becomes appropriate.
The accompanying press conference of the ECB decision on Thursday albeit was dovish, was full of uncertainties. So close to the zero bound for policy rates, and in a situation where any unconventional action would be politically sensitive, the ECB has less room for manoeuvre to accommodate a policy error. Rather than addressing the downside risks head-on, the ECB decided to play for time and gather more data.
The council did not want to pre-empt the new staff forecasts. In an unanticipated move, next month, the staff will publish 2016 forecasts, nine months earlier than usual. This creates some additional ambiguity. If projected inflation by 2016 remains significantly below the ECB’s definition of price stability, then the ECB would be required to potentially accommodate further, but would also take the risk of triggering themselves a dis-anchoring in market inflation expectations.
Member of the governing council of the ECB’s and Bank of France Governor, Christian Noyer argued it would be normal to see euro weaken given their delay behind the US recovery. On the inflation matter, he mentioned that the Euro area was not facing deflationary threats: “I’m saying it as strongly as possible: the situation has nothing to do with deflation. The situation isn’t normal but it’s not alarming.” On a different subject, he argued that turbulence in emerging markets is unlikely to affect the euro zone because transmission channels were limited. Over the French situation, he continued praising Hollande plan to lower social charges as the plan may add “several hundred thousand jobs” and one percent of GDP over two or three years.
Awaiting guidance from the inflation report, the Bank of England left both rates and asset purchases on hold, and gave no clues as to what to expect from next week’s inflation report. On Wednesday, the Bank is likely to provide an update on guidance given that the unemployment rate is closing in on the 7 percent threshold and is likely to go through it given the strong pace of GDP growth.
The Peninsula
