How Windy Is It . . . ? Monday, 7th March 2016 – No.169
How windy was it last week?
As we identified in issue 168 of Windy, last week was going to backend loaded with the US employment data due out on Friday. The market started the week in good spirits, buoyed by the better tone in data for the US economy, with expectation of growth in the first quarter of around 2.5%. This prompted a ‘risk-on’ stance from the market as March was ushered in, with the manufacturing index surprisingly on the upside for February and consumer confidence in the US continued to improve.
Then we had the nonfarm payroll numbers published. It was a resounding hit with 242,000 net job gains in February, beating consensus of 195,000 by some margin. The thought of a US recession, based on the strength of their economy, can pretty much be kissed goodbye. It was not all great news though and there were a few clouds among the thick silver linings.
It could be argued that the headline is exaggerating the overall strength in the labour market. The number of hours worked shrank from 36.6 hours to 34.4 (standing at a two-year low), most of the gains in jobs for February were for part-time employment and unemployment still stands at 4.9% which is an indication of the participation rate increasing.
All-in-all it was a good report for a key piece of leading economic data. Wage pressures are being contained and the clouds will keep the Federal Reserve unimpressed and lessen the need for another imminent rate hike.
What is holding our attention this week? The key is 10 and 10 on 10. On 10th March 2016, the European Central Bank (ECB) is widely expected to unveil further policy easing in response to last month’s lacklustre inflation reading. Consensus is looking for an additional €10 billion of asset purchasing and a cut of 10 basis points to the deposit rate. 10 and 10 on 10. Obviously nothing is ever that simple. The biggest risk is that the ECB fail to inject enough stimulus; if the market feels that Mario Draghi is reneging on his promise to “review and reconsider our monetary policy stance in March” then he risks strengthening the Euro and eroding any confidence in the ECB meeting its medium term targets for the economy.
Any half measures on Thursday will solidify the deflation fears, conversely it is important not to introduce too much stimulus. The fear will be the risk of running out of eligible assets, for their asset purchase programme, before inflation is back to their target level. Draghi had the touch of Midas back in 2012, now he needs the discerning taste of Goldilocks to deliver something not too hot or not too cold.