After disappointing Chinese data it was over to Super Mario – European Central Bank (ECB) President Mario Draghi – to try and lift the market on Thursday, in his press conference following the ECB’s latest monetary policy meeting. First, the bad news, the ECB’s projections for inflation and economic growth for the next three years were revised downward. The good news for markets? As expected the Italian didn’t disappoint, emphasising the ECB’s “willingness and ability to act, if warranted”.
Given that the ECB’s main interest rates are near zero or negative, all they can really do is buy more bonds. The ECB are currently purchasing bonds at a pace of €60 billion per month, expecting to hit their €1.1 trillion target by September 2016. However, Draghi reiterated that “the asset purchase programme provides sufficient flexibility in terms of adjusting the size, composition and duration of the programme”.
The US Fed implemented QE1 (Nov. ‘08), QE2 (Nov. ‘10), Operation Twist (Sept. ‘11) and QE3 (Sept ’12), increasing their balance sheet from $870 billion in September 2007 to near $4.5 trillion today. It seems highly likely that the ECB will have at least one sequel; QE2 the Europe edition awaits. The prospect of QE2 was enough to spur equity markets higher on Thursday, pushing European bond yields lower and causing the Euro to weaken.
Still, the relief rally on Thursday was short lived as the major equity indices moved sharply lower on Friday after a mixed US non-farm payrolls report. Market participants continue to eye every piece of US data as they speculate on whether the Fed will actually move on rate hikes this year, as Fed Chairwoman Janet Yellen has suggested they remain on track to do. Against a backdrop of market turmoil, the sense was that many were hoping for a bad jobs report to provide the Fed with another reason to hold off on rates.
As it turned out the report was mixed; less jobs were created in August than forecast but the unemployment rate declined to a better than expected 5.1%, a 6 ½ year low. The August jobs number is also typically subject to upward revisions. Overall, the report offered little support to the argument for the Fed to delay rate hikes, causing investors to rush for the exits in equity markets on Friday.
The obsessive focus on the Fed’s first rate hike illustrates a fragility in markets, overly reliant on record low interest rates and other extraordinary measures from the world’s major central banks. Markets have become hooked on an easy money habit that will be difficult to shake, the current turmoil been the obvious early stage withdrawal symptoms. QE2 is likely around the corner in Europe, and despite all the talk about rate hikes it would not be a surprise to see the US Fed resorting to QE4 in 2016, one last hit!!