An easing to quantitative easing? Markets react to ECB announcement
On the latest edition of Market Week in Review, Consulting Director Sophie Antal Gilbert and Senior Investment Strategist Paul Eitelman discussed key takeaways from the European Central Bank (ECB)’s recent meeting, highlights from the U.S. jobs report for February and the risks for potential trade wars.
Is the ECB’s quantitative easing program on the ropes?
At a March 8 press conference following the ECB’s monetary policy meeting, President Mario Draghi revealed that the central bank will no longer step in and increase bond purchases in the event of an economic downturn, Eitelman said. “The ECB specifically removed this piece of guidance from its quantitative easing (QE) program, due to the continued improvement in economic growth and employment across the eurozone,” he stated, adding that Draghi also emphasized the need for the bank to maintain some level of monetary stimulus to move toward its 2% inflation target.
“Draghi very carefully threaded the needle here, pulling off a delicate balancing act,” Eitelman remarked. Essentially, in his viewpoint, the central bank is signaling that it’s gradually removing its accommodative monetary policy measures—at a measured pace that markets are prepared for. Equity markets reacted positively to Draghi’s comments, he noted, with the Euro STOXX 50® Index closing 3% higher on March 8 than the previous day.
U.S. February employment report shines
U.S. payroll data for February was released by the Bureau of Labor Statistics on March 9, Eitelman said—and the results were a huge positive surprise. The nation created 313,000 new jobs last month, he said, far-and-away beating consensus expectations for 200,000 job additions. Wage inflation was on the softer side, with a 2.6% year-over-year increase, Eitelman noted—a decline from the 2.9% increase in January that helped spark the Feb. 5 market sell-off. “In a nutshell, today’s employment report points to a Goldilocks economy in the U.S. for investors, with strong job growth and not a lot of evidence of inflation,” he said. This was a big positive from a market perspective, Eitelman added, as evidenced by the S&P 500® Index, which was up roughly 1% mid-day on March 9 from its previous close.
All that said, in Eitelman’s opinion, the fundamentals are still there for wages to slowly accelerate over time due to the nation’s strong labor market. “This should keep the U.S. Federal Reserve (the Fed) on track to raise interest rates three or four times this year,” he concluded.
Market jitters fade slightly after changes to U.S. tariff plan
Shifting to trade, Eitelman said that the risks of a trade war simmered slightly the week of March 5. Why? The Trump administration initially indicated that tariffs imposed on steel and aluminum imported to the U.S. would be universal in scope, Eitelman said, but walked this back a bit on March 8 with President Trump’s announcement that Canada and Mexico would be exempt from the tariffs. “From a market perspective, this takes the teeth out of some of these protectionist measures,” he said, calling the news “less bad” than investors may have originally feared.
Another piece of positive news surrounding trade was that Trump struck a more optimistic tone on the ongoing North American Free Trade Agreement (NAFTA) negotiations, Eitelman said. “The president sounded a little more upbeat that a successful resolution could be achieved, allowing NAFTA to remain in place,” he observed. Ultimately, in Eitelman’s opinion, both this and the slightly more favorable details surrounding tariffs combined to lift markets the week of March 5.