All three U.S. major stock index (Nasdaq, Dow, and S&P 500) lost over 2 percent on Friday with heavy selling at the close of the day amid rising concerns that accommodative monetary easing policies and stimulus packages undertaken by central banks in the U.S. and EU are gradually beginning to dry up.
On Thursday the European Central Bank (ECB) kept their key benchmark interest rate unchanged and refrained from extending their monthly asset purchases of €80 billion which is set to run out in March 2017.
Despite the ECB’s extraordinary monetary policy accommodations over the past several months, consumer price inflation rose just 0.2 percent in August in the 19 member euro area, the same level as July, and euro area GDP increased by 0.3 percent, quarter on quarter, in the second quarter of 2016, after rising 0.5 percent in the fist quarter.
ECB President Mario Draghi defended the ECB’s decision to not provide any further adjustments in monetary policy during his follow up press conference on Thursday:
We see that our monetary policy is effective – and we can discuss it later; it’s fully effective, in fact. We see that the full impact of the March decisions is now in the macroeconomic projections, but we also see that there have been considerable decreases in all interest rates, for example long-term interest rates are now below, I think, 43 basis points of what they were before. And these low rates do reflect to some extent expectations of a continuation, as I just said, of the extraordinary monetary policy support that’s been extended.
Draghi admitted that the risks to the euro area growth outlook remain “tilted to the downside” after citing subdued foreign demand, partly due to uncertainties following the UK Brexit referendum outcome, necessary balance sheet adjustments in a number of sectors, and a sluggish pace implementing structural reforms.
The decision to not extend any monetary stimulus measures on Thursday during the ECB’s policy meeting sparked a selloff in European bonds that carried over to bond markets in the U.S. and Japan.
The yield on the German 10 yr. Bund rose above zero for the first time since July and the U.S. 10 year Treasury climbed 3.47 percent on Friday to 1.67, a significant move that suggests the market is beginning to prepare for the likelihood of monetary tightening.
Comments during a Friday speech from Federal Reserve Bank of Boston President Eric Rosengren about gradual tightening being “appropriate to remain at full employment” helped to accelerate the across the board selloff in the U.S. market.
“A failure to continue on the path of gradual removal of accommodation could
shorten, rather than lengthen, the duration of this recovery” Rosengren said.
Rosengren admitted that in his own view, based on the data the Fed has received, a reasonable case can be made for “continuing to pursue a gradual normalization of monetary policy.”
During a Jackson Hole Wyoming Symposium in late August, Fed Chair Janet Yellen said that the Federal Reserve is getting close to raising interest rates and the case for a rate increase had grown stronger.
The Week Ahead- U.S. Market
Investors and economists will have plenty of new economic data in the U.S. to digest and absorb later this week.
Retail sales for August is due on Thursday, the same day another inflation gauge, Producer Price Index (PPI) is reported for August along with Industrial Production.
Briefing.com has a consensus estimate of a decline – 0.1 percent with August retail sales after a flat reading of 0.0 percent in July.
On Friday another inflation measurement, CPI, is due for the month of August.
Full Economic Calendar
Tuesday- Treasury Budget (August)
Wednesday- MBA Mortgage Index, Export/Import Prices (August), Crude inventories
Thursday- Initial and Continuing Jobless Claims, Retail Sales (August), PPI (August), Philadelphia Fed (Sept.), Current Account Balance (Q2), Empire Manufacturing (Sept.), Industrial Production (August), Capacity Utilization (August), Business Inventories (July), Natural Gas Inventories
Friday- CPI (August), Michigan Sentiment (Sept.), Net Long Term Tic Flows (July)