Persistent hopes of Central Bank activism have been a key prop for the market in recent days, helping stocks hold their ground even as the economic and earnings pictures lose momentum. But with those hopes not getting realized, as we saw with the Fed on Wednesday and the European Central Bank this morning, will the market finally start heading lower, or see the ‘disappointment’ as only temporary?
The Fed’s statement on Wednesday appeared to indicate that they remain ready to ‘do something’ should the ongoing deceleration in the economy persist. The consensus view had shifted the QE expectation to the Fed’s September meeting even before Wednesday’s statement. As such, Fed watchers will remain in a wait-and-see mode for some more time and evaluate each new incoming economic data from the perspective of how it increased the odds of QE in the September meeting.
But the question remains whether the incoming data needs to maintain the recent soft trend line or materially weaken further to trigger fresh Fed action. From that perspective, this morning’s initial Jobless Claims data is not materially weaker than what we have seen in recent days. We got an 8K increase in initial claims this morning to 365K (a rise of 12K when combined with revisions to the prior week’s tally), with the 4-week average went down 2.8K to 365.5K. This could be read as indicating that the ‘jumpiness’ in the series due to the auto sector’s seasonal adjustments may be abating.
Mario Draghi’s statement this morning is disappointing, particularly following his ‘tough talk’ last week. While investors may be willing to wait for the Fed, they may not extend the same courtesy to the ECB given where the Spanish and Italian government bond yields are trading already. The ‘Draghi let-down’ will likely be the key backdrop for today’s market action.
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