Eye opener. Stocks sank yesterday as investors worried about an economic slowdown. The European Central Bank lowered its Euro area growth outlook for 2019 and offered some dovish policy stoking more fears of a global slowdown.
WHAT YOU NEED TO KNOW:
1) The European Union is experiencing a slowdown. Mario Draghi announced that ECB lowered its 2019 growth forecast to +1.1% from +1.7%. The European equivalent to the US Fed also announced that it would be providing low interest loans to banks and that it would put any plans of rate hikes on hold. European stocks sold off on the news and the Euro currency sank.
2) The US Dollar grew stronger yesterday as the Euro weakened. As bond yields in the EU go down, demand for higher yielding US bonds increases and in order to buy US bonds traders must convert into US dollars causing the currency to rise. See chart 13 in my attached daily chartbook.
3) A strong dollar is not good for American companies who sell their goods abroad. A stronger dollar means that US goods will be more costly to foreign buyers which will lower demand for US exports. The strong Dollar is one of the causes in the slowdown in corporate earnings.
4) EU officials are preparing a list of tariffs on $22 billion of US goods. The tariffs would be used as a counterstrike if President Trump decides to move forward with his threatened auto tariffs.
The reality of slow growth seemed to set in yesterday as stock traders sold off on an ECB announcement that they were lowering 2019 economic growth projections. The ECB also announced some stimulus along with a pledge to push out rate hikes. Stock indexes slipped as the S&P500 fell by -0.81%, the Dow Jones Industrial Average sold off by -0.78%, the Russel 2000 sank by -0.86%, and the NASDAQ 100 pulled back by -1.2%. Bonds rallied bringing the 10 year treasury yield to 2.64% and the 2/10 yield curve flattened to +16 basis points. The ECB move represents a dovish policy shift similar to that of the US Fed and many traders were confused that the markets responded negatively to the news. The move in global equities should not be surprising because while stimulus is certainly welcomed, investors often forget that the reason for the stimulus is a slowing economy. Same thing, different viewpoint! Many analysts also believe that the ECB was not aggressive enough in its response. The ECB just recently ended its bond buying program (quantitative easing) and some hoped that Draghi would restart the program. Unfortunately for the ECB, their benchmark rate is at -0.4% (yes that is negative), so there is not really much room to spark growth with interest rates. The US Fed has been as aggressive as possible in its hiking rates over the past few years to avoid being in that same position. For now, US rates will remain at 2.5% as the Fed patiently awaits economic data to suggest otherwise.
WHAT TO LOOK FOR TODAY:
This morning we will hear from the Bureau of Labor statistics in their monthly employment situation release. Non-Farm payrolls are expected to have increased by +180k versus +304k in January. The slowdown may be due to seasonal factors, a short month, and bad weather. The Unemployment Rate is expected to be at 3.9% down slightly from last month’s 4.0%. Wages, which are an important driver of Fed policy, are expected to have grown by +3.3% year over year, up from January’s figure of +3.2%. Also this morning we will get Housing Starts for January and analysts are expecting a growth of +10.9% versus the prior period’s pullback of -11.2%. Jay Powell will speak today and traders will hope to hear his thoughts on yesterday’s ECB’s announcement. Next week will bring releases of retail sales, gauges of inflation, Durable Goods Orders, and sentiment indicators amongst others. Clocks spring forward on Sunday morning. Have a great weekend.