Big Picture

ECB to Restart Quantitative Easing; N.A. Markets Relatively Calm

The European Central Bank (ECB) cut its key interest rate 10 basis points and will start buying 20 billion a month of eurozone debt, relaunching a quantitative easing (QE) program that was only phased out last December. The move is the ECB’s largest monetary stimulus program in nearly four years. After the announcement, the euro fell sharply against the dollar, and eurozone government bonds rallied, as investors anticipated a longer period of low interest rates. The new QE program is reportedly expected to “run for as long as necessary.”

In anticipation of the ECB’s move, U.S. President Donald Trump on Wednesday called for the Federal Reserve to take rates down to zero. The Fed is expected to cut its key interest rate by 25 basis points next week, following a similar cut in late July, its first in over a decade.

The ECB announcement, along with news that Trump would postpone new tariffs on $250 billion in Chinese imports, sent U.S. stocks higher Thursday. Overall, it’s been a relatively quiet week so far for North American markets. The TSX and all three major U.S. indexes were up on Wednesday, buoyed by optimism on the trade front after China announced its first batch of tariff exemptions for some U.S. products, days ahead of planned trade negotiations. The Dow climbed more than 200 points during Wednesday’s session, and the TSX was up nearly 75 points.

While trade tensions have somewhat abated thus far this week, the International Monetary Fund on Thursday warned that tariffs imposed by the U.S. and China could lower global economic output by 0.8% in 2020.


N.A. Markets Up as Trade Tensions Appear to Ease

For the four days covered in this report, the Dow gained 385 points to close at 27,182, the S&P 500 added 31 points to settle at 3,010, while the tech-heavy Nasdaq climbed 91 points to close at 8,194. In Canada, the TSX was up 108 points to end at 16,643.



A 25bps rate cut is all but guaranteed at the Fed’s meeting next week – A soft print on headline CPI (0.1% MoM vs. 0.1% exp., 0.3% previously) was fully expected yesterday, owing to falling gasoline prices. Core CPI however, which excludes typically volatile food and energy prices, grew 0.3% MoM for the third consecutive month, for the first time since 1995. The advance in core inflation was broad-based, with most major categories contributing including shelter, medical care, airline fares, apparel, and personal care. Despite the recent upward trend in core CPI and lateral trend in non-core CPI, personal and consumption expenditure, the Fed’s preferred inflation metric, continues to fall well short of the central bank’s 2% target. Core PCE could indeed follow and make greater than expected move higher toward the 2% policy target. If so, market pricing may be over-exaggerating cumulative easing by the Fed over the next few quarters. Yesterday’s data will likely embolden some of the more hawkish members of the Federal Open Markets Committee (FOMC) to maintain their course in arguing against further policy easing. Namely, Regional Fed Presidents Esther George and Eric Rosengren could both repeat their dissention from July, next week.

(Bill Curry)

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