Inflation falls to lowest level in 5 months

Share Markets:

The announcement by the European Central Bank (ECB) to expand its asset purchases and adopt a large scale quantitative easing program was well received by markets see below for more details).

Equity markets rallied in Europe - the Euro Stoxx rose 1.6%, and in the US, the Dow and S&P500 indices were both up 1.5%.

Interest Rates: 

Global bond yields fell in reaction to the ECB announcement, as the purchase program would increase the demand for government debt.

Yields on German 10-year bunds fell 8 basis points to 0.45%.

US 10-year treasury yields dipped to a low of 1.81% after the ECB announcement before recovering to 1.86%.

In Australia, yields on 3-year bond futures were little changed at 2.04%. Yields on 10-year bond futures slipped in line with other global bonds but then recovered to 2.56% to be little changed.

Foreign Exchange: 

The US dollar index edged higher, while the euro slid to its lowest in more than 11 years against the greenback.

The Australian dollar was mostly steady until early this morning when it briefly broke below 80 US cents, hitting an intraday low of 0.7995. 

Commodities:

Oil prices slipped overnight, but appear to be stabilising at around mid-$40 a barrel. Gold prices however, rose above US$1300 an ounce after the ECB announced their stimulus program.

Australia:

The St.George - Melbourne Institute household financial conditions survey for December was released yesterday.

The index rose by 2.6% from September to December to 128.8 the highest reading in a year. Compared to a year ago, however, the index was down 2.9%.

The index continued to reflect some caution by households adding to savings or looking to pay down debt.

However, the survey has indicated that households are still shifting their savings to risky assets, such as shares and property. 

HIA new home sales rose 2.2% in November, following a 3.0% gain in October. The number of new homes sold was the strongest in seven months and indicates that housing activity remains elevated.

Consumer inflation expectations edged down from an annual pace of 3.4% in December to 3.2% in January, the lowest in five months.

A tick down in inflation expectations is unsurprising given the recent fall in petrol prices and suggests that inflation expectations are well contained.

Europe:

The European Central Bank (ECB) announced that it will purchase sovereign bonds from March until the end of September 2016.

In combination with the already announced program of purchasing asset backed securities and covered bonds, the ECB will be purchasing a total of 60 billion euro of assets per month.

By September 2016, the ECB's balance sheet will increase by more than 1 trillion euros, an aim that Draghi had hinted at in previous commentary.

The ECB and individual central banks of the euro zone will be purchasing bonds in proportion to its "capital key" which indicates a larger proportion of debt will be purchased from the larger nations, such as Germany.

In a concession to some of the German concerns of monetising debt of troubled nations, the ECB will be subject to risk of only 20% of purchases.

The remaining 80% of asset purchases "will not be subject to loss sharing" which suggests most of the potential losses of holding the sovereign bonds will be borne by each of the countries' central banks.

Interest rate policy was unchanged.

While the announcement appeared to be well-received by markets, there have been concerns raised that by not completely sharing total risks, it does not represent unified monetary policy and undermines the will to keep together the euro zone as a singular currency.

In other European news, Eurozone consumer confidence improved from -10.9 to -8.5 in January.

New Zealand: 

ANZ job ads rose 0.8% in December after a 0.3% decline in November. It was the first rise in 3 months and point to further moderate conditions in the labour market.

The business NZ manufacturing PMI rose from a revised 55.6 in November to 57.7 in December, indicating a stronger expansion in activity towards the end of 2014.

United Kingdom:

The CBI industrial trends survey showed total orders slipped to 4 in January from 5 in December.

United States:

US initial jobless claims fell 10k to 307k for the week ending 17 January.

It was the third consecutive week over 300k. While claims remain low by historical comparison, it could be some early evidence of some moderation in the labour market.

House prices rose 0.8% in November, for a 5.3% annual gain according to the FHFA.

In other data, the Kansas City Fed factory index slowed from 8 to 3 in January, the lowest in five months.



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