Stocks ended in the red on the first day of December, but appear on track to reverse course in today’s session following a positive market action in Europe ahead of the ECB meeting on Thursday. Not much on the data calendar today, though market participants will continue to handicap the health of this holiday shopping season following mixed numbers for Black Friday and Cyber Monday.
Expectations remain low that the ECB will come out with the long-desired quantitative easing program on Thursday where it will start purchasing sovereign bonds along the lines of what the U.S. Fed and the Bank of Japan have been doing. Mario Draghi, the ECB President, is all for such a program, but he heads a divided governing council that is reportedly split evenly between supporters and opponents.
Hopes remain high that the Draghi ECB will eventually come around to purchasing government bonds, even though recent signs of improving German sentiment measures could make it less likely for that country to get behind the Draghi plan. That said, market participants see a full-fledged QE as essential to the central bank’s ability to ward off deflation, a job that has been made even tougher by the recent sharp drop in oil prices.
The market’s expectations from the ECB put a spotlight on its policy divergence from the U.S. Fed which recently ended its QE program and is expected to start tightening policy around mid-2015. This monetary policy divergence is a function of the evolving economic fortunes of the two regions, with growth getting stalled in Europe but expected to accelerate in the U.S.
Economic growth in the U.S. has been notably stronger in the last two quarters and the recent drop in oil prices will likely serve as a further stimulus to the economy’s growth momentum. The appreciating U.S. dollar relative to the currencies of other regions like Europe and Japan is a reflection of this divergence, a trend that will likely continue into 2015 as well.
The outlook for U.S. consumer spending remains favorable, notwithstanding the mixed holiday shopping data thus far. Spending has been shifting online for quite some time and the trend appears to be even stronger this year with even traditional retailers like Wal-Mart (WMT) and Macy’s (M) benefiting from the shift. Wages haven’t moved up as the unemployment rate has come down, but it reasonable to expect that falling gasoline prices will have some beneficial impact.
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