03|03|2016

ECB vs FRB

256px-Logo_European_Central_Bank.svg_-150x150

Markets received a double dose of bad news on Thursday. The reaction was bad, but the Friday bounce back was epic!

Central Banks

On Thursday there was news of the European Central Bank (ECB) loosen monetary policy further.  This would typically be information that would be received positively, however it was widely expected and actually under delivered market expectation.

Also on Thursday the Federal Reserve Board (FRB) Chair, Janet Yellen, gave a statement that all but sealed the deal for a rate hike in December.

US

These statements hit the market and sent them tumbling. Surprisingly, data that came earlier in the week was more scathing and prompted nearly no reaction. On Tuesday the ISM Manufacturing report was released and showed that the index had fallen below the all-important 50 mark. This mark denotes the whether an industry is expanding (above 50) or contracting. It came in at 48.6, down from 50.1 in October[1].

While manufacturing disappointed, on Friday the unemployment report did nothing of the sort. The rate held strong at 5.0% with an increased revision to jobs added over the past two months. Digging deeper into the report yielded minor weakness in the way of wage increases (2.3% annually) and an uptick in underemployment (9.9%)[2].

This was further indication that the FRB will likely hike rates this month. While this is good news, as of late, the markets have treated it as bad news… Not this time, the market responded on Friday with a massive rally that spread across the Dow Jones, S&P 500, and the NASDAQ. This is a sign that markets are likely ready for the FRB to move.

Europe

As indicated earlier the major news out of Europe was increased stimulus from the ECB.

Economic data showed a strengthening of manufacturing and a continued weakness for inflation. This latter data point is the root cause of ECB action. ECB President Draghi made comments earlier that made it sound as though his actions would be deeper then they ended up being.

China

Caixin Manufacturing index unfortunately remained contractionary at 48.6 for November. While contractionary, it is an improvement over October, which was 48.3[3].

 

For more information:

If you would like to receive this weekly article and other timely information follow us, here.

Always remember that while this is a week in review, this does not trigger or relate to trading activity on your account with Financial Future Services. Broad diversification across several asset classes with a long term holding strategy is the best strategy in any market environment.

Any and all third-party posts or responses to this blog do not reflect the views of the firm and have not been reviewed by the firm for completeness or accuracy.

[1] www.investing.com – economic calendar

[2] www.mfs.com – week in review

[3] www.investing.com – economic calendar