A Little Less Conversation, a Little More Action

RalphCole_032_web_ by Ralph Cole, CFA Executive Vice President of Research

A Little Less Conversation, a Little More Action

The European Central Bank (ECB) finally stopped jawboning the markets this week and put into place additional policies to get the European economy moving forward. Slow growth and disinflation continue to loom over the EU and spurred the ECB to take aggressive actions.

Specifically, the ECB announced the following policy actions1; they are:

1)      Lowering the Eurosystem refinancing rate to .15 percent 2)      Lowering the interest rate on the marginal lending facility to .40 percent 3)      Lowering the deposit facility rate to negative 10 basis points (you have to pay the ECB 10 basis points to hold your money if you are a bank) 4)      They have outlined a new $400 billion long-term refinancing operation (LTRO) to aid bank lending

The ECB stopped short of QE but did not rule out the idea in the future. The central bank is hoping to stimulate bank lending which in turn should promote growth throughout the region. The EU is anticipating that some of this growth comes from a weakening Euro. A weaker currency would encourage tourism and make EU products cheaper abroad.

Working for the Weekend

We would be remiss if we didn’t at least mention the monthly jobs report that comes out the first Friday of the month. We have pointed out to readers that it is probably the most important report for understanding the durability of the recovery and the mood of the American consumer.

At this point in the cycle, we are also starting to look at the monthly jobs report for an additional source of insight about inflation. Wage inflation is a precursor to overall inflation in the economy. Wages in the U.S. have started to rise, albeit slowly. For the month of May average hourly earnings increased 2.4 percent year-over-year. While that is not a level that we would deem inflationary, wages in certain sectors are accelerating.

Takeaways for the Week

  • Equity markets around the world responded positively to the new round of policies announced by the ECB this week
  • Job growth of 217,000 was not enough to trigger sharp wage inflation in the month of May

1Source: Barron’s