December 3 – European Central Bank President Mario Draghi cut its deposit rate once again this morning to stimulate the region’s economy. The rate for money parked at the central bank will drop to minus 0.3%, versus minus 0.2% previously. The steeper negative interest rate is an attempt to push money out into the economy to stimulate growth. Furthermore, the central bank extended its asset purchasing program another six months to March 2017. The ECB will also extend its program to include purchases of regional government bonds.
The ECB announcement was a disappointment to the equity markets, with U.S. stock futures turning lower. An expansion of the ECB’s asset purchasing program was expected; not merely an extension. Failure to expand may have more to do with Draghi’s limited availability of additional options to purchase more than confidence in the economy and that speaks volumes to traders. The currency markets had built in expectations that euro supplies would be increasing with an expansion. Failure to do so resulted in a massive short-covering rally for the euro and corresponding collapse of the U.S. dollar.
Weakness in the dollar then supported modest money flow back into the broader commodity sector, allowing the Thomson Reuters CRB index to come off Wednesday’s fresh 13-year low as the dollar came off its 12-1/2 year high. Keep in mind that the story isn’t over yet. The U.S. Federal Reserve will meet December 15 & 16 to discuss a possible rate hike; the first since 2006. That could still provide support for the dollar, although not to the extent that we would have expected had the ECB expanded its asset purchasing program.
The Fed is expected to initiate lift-off for monetary tightening with a rate hike on the 16th, but it’s still not a guarantee. Fed Chair Janet Yellen sounded pretty hawkish in comments she made on Wednesday, saying that she looks forward to the first rate hike to signal to the markets that the economy is healthy.
However, the Fed will not doubt be looking to tomorrow morning’s highly-anticipated monthly jobs report for guidance as well. That report is expected to show unemployment unchanged at 5.0%, with the economy creating 190,000 jobs in November, down from 271,000 the previous month. Average hourly wages are expected to rise 0.2%, down from a 0.4% rise the previous month.
The Federal Reserve released its Beige Book on Wednesday, which is the economic analysis that it will largely focus on when it meets on December 15 & 16. It noted that economic activity is growing at a “modest” pace in most regions. That leaves Fed members asking, “is the glass half full or half empty?” Do they see the economy as sluggish and hurting, or moving slowly forward to build a foundation for future growth?
Meanwhile, the United States mourns the loss of 14 in a deadly mass shooting in California. Authorities are still not yet willing to call the incident a terrorist act, but they concede that there are indicators that are pointing in that direction. Wall Street is responding more to economic news this morning, but traders also acknowledge that the California shootings may signal a new era in the terror threat faced by U.S. citizens and its economic activity. As such, Wall Street is watching closely.
Finally, USDA’s export sales report for the week ending November 26 provided yet another reminder that demand for U.S. agricultural commodities remains sluggish. Cheaper alternative supplies continue to hamper U.S. exports, with the problem compounded by the dollar’s strength after hitting a new 12-1/2 year high this week.
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