The ECB’s relatively modest stimulus package has seen markets wind back concerns about the extent of policy divergence between the Fed and other major central banks.
We now have a situation where the ECB has delivered a stimulus package at the lower end of market expectations while the Bank of Japan is showing no sign of adding to its QE program unless the Yen strengthens significantly. This underscores the likelihood of a scenario where, despite an initial period of policy divergence, the Fed is about to begin a process where over time, it will lead the gradual global wind back of stimulus by major central banks.
In the short term the ECB’s pain will be the Fed’s gain. Last night’s sharp drop in $US against the Euro will make it easier for the Fed to lift rates at its December meeting and potentially again in the first quarter of next year. This possibility was reflected in a jump in US bond yields in last night’s session.
The pace of US monetary tightening is going to depend heavily on the extent of ongoing improvements in US wage rates and the labour market. Last night’s news of a significant drop in the employment sub index of the Non-Manufacturing PMI does not bode well given that this index covers around 90% of US industries.
The local share market will follow last night’s global lead in opening lower. However, at the end of the day, the ECB’s stimulus package is of only marginal relevance to most Australian stocks. While the ECB’s action signals that global stimulus may come to an end a little sooner than some are forecasting, this is unlikely to have a material impact on the outlook for domestic interest rates at this stage.