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Market to open lower but does a modest miss on the ECB stimulus package really matter much for Australian stocks?

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.
By · 4 Dec 2015
By ·
4 Dec 2015
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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.

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Ric Spooner
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Frequently Asked Questions about this Article…

The ECB's modest stimulus package has eased concerns about policy divergence between the Fed and other major central banks. It suggests that while there may be initial divergence, the Fed will likely lead a gradual global wind back of stimulus over time.

The ECB's decision has led to a drop in the US dollar against the Euro, making it easier for the Fed to consider raising interest rates at its December meeting and possibly again in the first quarter of next year.

The ECB's stimulus package is considered modest because it was delivered at the lower end of market expectations, indicating a cautious approach to monetary policy compared to other central banks.

The pace of US monetary tightening will depend heavily on improvements in US wage rates and the labor market. Recent data showing a drop in the employment sub-index of the Non-Manufacturing PMI suggests potential challenges ahead.

The ECB's action is expected to have only marginal relevance to most Australian stocks. While it signals a potential end to global stimulus sooner than expected, it is unlikely to materially impact domestic interest rates at this stage.

The drop in the US dollar against the Euro is significant because it eases the path for the Fed to raise interest rates, reflecting a shift in monetary policy dynamics between the US and Europe.

The Bank of Japan is not adding to its QE program unless the Yen strengthens significantly, indicating a wait-and-see approach to monetary policy adjustments.

The ECB's stimulus package suggests that while there may be short-term policy divergence, major central banks, led by the Fed, are likely to gradually wind back stimulus measures over time.