The disappointment from yesterday's ECB announcement was clearly felt in the financial markets. EUR/USD rebounded to as high as 1.0980 after dipping to 1.0517 earlier in the day. The move dragged down dollar index through near term support at 98.43 to as low as 97.59, which signals near term reversal. The stock markets were also rocked. DAX closed down -400 pts, or -3.58%. CAC dropped -175 pts or -3.58%. FTSE dropped -145 pts or -2.27%. US equities were also dragged down with DJIA lost -252 pts or -1.42%. S&P 500 dropped -29 pts or -1.44%. The sentiment carry on in Asian session with Nikkei down over -300 pts in initial trading. The financial markets are now looking forward to another key event of non-farm payroll report from US.
ECB at its December meeting announced to cut the deposit rate by -10 bps to -0.3%, effective December 9. The main refi rate and the marginal lending rate stayed unchanged at 0.05% and 0.3% respectively. At the press conference, President Mario Draghi announced extension of asset purchases by 6 months, suggesting purchases would continue until end March 2017, or beyond if necessary. Regional and local government debt are now included as eligible assets for buying in the program. Yet, the ECB maintained the pace of asset buying at 60B euro/month. Reactions in the financial markets showed the market was disappointed by the magnitude of the easing measures. Indeed, some had anticipated a strong deposit rate cut to -0.4% and acceleration of the pace of asset purchases from 60B euro/month. More in Draghi Over-Promised, Under-Delivered. Euro Jumped to One-Month High.
In US, Fed chair Janet Yellen testified before Congress Joint Economic Committee yesterday. She noted that "US economic growth is likely to be sufficient over the next year or two to result in further improvement in the labor market." And, "ongoing gains in the labor market, coupled with my judgment that longer-term inflation expectations remain reasonably well anchored, serve to bolster my confidence in a return of inflation to 2% as the disinflationary effects of declines in energy and import prices wane." Earlier in the week, Yellen also noted that between now and the next FOMC meeting, there will be "additional data that bear on the economic outlook" and policymakers " will assess all of the available data and their implications for the economic outlook in making our policy decision."
The non-farm payroll report will be a critical piece of data to close the case for Fed's hike on December 16. Markets are expecting 198k growth in the US job market in November while unemployment rate is expected to be unchanged at 5.0%. Judging from other job data, there is scope for downside surprises. The ADP private job data was positive and rose to 217k in November, beating expectations. The employment component of ISM manufacturing also rose to 51.3, up from 47.6. But the employment component of ISM services dropped to 55.0, sharply down from 59.2. Four week moving average of initial jobless claims rose 6k to 269k. Conference Board consumer confidence showed deep deterioration to 90.4, comparing to 99.1 in October and recent high of 102.6 in September. Thus overall, we'll be cautious on NFP miss that could trigger another round of selloff in the greenback.
Elsewhere, Australia retail sales rose 0.5% mom in October. Japan will release consumer confidence. Eurozone will release retail PMI and German factory orders. Swiss will release CPI. US will release NFP and trade balance. Canada will release employment, trade balance and Ivey PMI.