ECB Finally Does QE


Thursday, September 4, 2014

Stocks were indicated to open in the green even before this morning’s surprise rate-cut announcement by the European Central Bank and the largely in-line ADP (ADP) jobs report on the home front. These reports should help provide a favorable backdrop for today’s trading action.

The ECB did come out with a QE program of its own, hopes for which had risen following Mario Draghi’s comments at the Fed’s Jackson Hole meeting. The decision to purchase asset-backed securities may not come across as effective as the Fed’s purchases of treasury bonds and mortgage-backed securities. But it’s nevertheless a QE program, and indicates the ECB’s willingness to do everything possible to fight the currency bloc’s deflation spiral.

This decision and the accompanying rate cut announcement also seems to indicate that the dominant ‘German faction’ within the ECB’s governing council has come onboard with an easy monetary policy after a long period of resistance. This is a net positive for Europe and markets here.

On the home front, the August jobs report by payroll processor ADP came in a tad bit shy of estimates at 204K, but remained largely within the range of recent monthly tallies. The number for the prior month was modestly revised down – lowered by 6K to 212K. Importantly, the 204K tally for August was the 5th straight month of jobs gains in excess of 200K.

The consensus expectation for tomorrow’s government jobs report is for ‘headline’ gains of 226K, which includes government jobs that have been averaging in the 5K to 10K monthly level lately. An overly simplified way to look at tomorrow’s government jobs report is that we should get a ‘headline’ tally in the 209K to 214K range, which is basically 204K private sector jobs (per today’s ADP report) and government jobs in the 5K to 10K range.

The ADP report’s gains were broad-based, with small businesses adding 78K jobs, medium sized businesses adding 75K and large businesses adding 52K. The goods-producing sector added 41K jobs in August vs. 23K in July. In terms of industries, construction added 15K and manufacturing added 23K in August. The manufacturing sector’s August gains were the highest since December 2012. The service sector’s 164K jobs in August were down from July’s 190K tally, with less growth in all key service sector industries like professional and business services and trade/transportation.

The big news of the day is the ECB decision and its impact on global markets. Along the lines of what the Fed’s QE program did for U.S. stocks, the ECB’s easing program should be a net positive for stocks.

Sheraz Mian
Director of Research

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