The violent upwards reaction in all things euro in response to a set of ECB decisions that underwhelmed expectations (and which President Draghi was himself responsible for creating) was compounded by the momentum established in the minutes leading up to the announcements by a Financial Times tweet – “ECB leaves rates unchanged in shock decision”. As the wags at Zero Hedge quickly tweeted, ‘Good start for the Nikkei Times” (this being day two under their new Japanese ownership).

The ECB announced four things: 1. A 10bp cut to the deposit rate to -0.3%. 2. An extension of the planned end-date of the QE programme from September 2016 until March 2017. 3. Agreement to reinvest the principal of bonds maturing on the ECB’s balance sheet. And 4. A broadening of the range of assets the ECB can buy under its Asset Purchase Programme (APP), to include regional and local government debt.

The markets’ disappointment stemmed from the failure to announce an increase in the scale of monthly asset purchases beyond the current €60bn per month, and the fact that the consensus expectation on the deposit rate was for a cut of more like 15bps than 10bps. According to several source reports, what the ECB announced was exactly what ECB chief economist Peter Praet and Mr. Draghi had proposed. Given the decision was not passed unanimously the strong suspicion is that if Praet and Draghi had proposed something more aggressive, they may have struggled to win comfortable majority support. Hence Mr Draghi has effectively now lost his ‘Super Mario’ moniker.

From pre-announcement (or pre FT-tweet) levels of around 1.0550, EUR/USD jumped to around 1.09 in the hour or so after the announcement and since risen to around 1.0950 heading into the New York close.  The biggest gains for the euro have been recorded versus the CAD and USD (both down more than 3%) followed by AUD and NZD (both down by just over 2.5%). Risk assets were especially disappointed by the apparent confiscation of Mr. Draghi’s ‘big bazooka’.  Eurozone stock markets were mostly off by more than 3%. 10 year German Bund yields, meanwhile, jumped by almost 20bp to 0.664%.

Notwithstanding the knee-jerk response to the ECB’s action and the evident very stretched short EUR positioning running into it, we would still judge that EUR/USD will be lower come year-end and assuming of course that the Fed moves on rates in two weeks’ time. Our current FX Strategy forecast is 1.06). In particular, the cut to the deposit rate will further enhance the euro’s status as the pre-eminent funding currency, as well as encouraging Eurozone banks to buy more foreign currency assets rather than pay yet more to park deposits at the ECB.

As for the Fed, Yellen’s Congressional testimony a few hours ago was identical to the speech she gave on Wednesday. She did emphasise the restraining influence of dollar strength, so the fact the dollar has just shed over 2% immediately lessens this constraint. Hence US yields have risen by almost as much as their Eurozone counterparts.

Data wise, the overnight highlight was the US non-manufacturing ISM, which came in beneath expectations at 55.9 (down from 59.1 in October and 58.0 expected). The employment sub-component fell, but not to the point where it seriously dents consensus expectations for a near 200k payroll print tonight.  In testimony, Yellen reminded us that 100k new jobs per month is now sufficient to keep pace with labour force growth (and hence keep the unemployment rate from rising, assuming unchanged participation).

Coming Up

Post ECB, it’s eyes down awaiting tonight’s November US payrolls report – surely the only data that now stands between the Fed and 17 December rates ‘lift (or rather crawl) off’. Consensus is for a 200k rise in payrolls and an unchanged 5.0% unemployment rate.  Anything close to this set of outcomes will seal the deal for the Fed, this week’s fall-back in the ISMs notwithstanding.

Locally, October retail sales data ends the week with the report expected to be another small positive. NAB is looking for monthly growth of 0.2%, and the consensus estimate is 0.4%. We suggest some moderation in the growth rate could occur after a few months of solid prints. Notwithstanding, consumer sentiment is now slightly above average, retailers continue to report above-average business conditions and are reporting strong sales heading into Christmas

Also in our time zone and rating a mention amid renewed speculation on whether the BoJ might ease further, labour cash earnings for October are due at 12:30 AEDT.

As well as US payrolls, the speaker circuit is very full (including Mario Draghi hopping to New York hot from the ECB meeting to speak at 11:45 am NY time. Hopefully this isn’t because he’s running away from some irate Bundesbankers). Bullard, Kocherlakota and new Philadelphia Fed president Patrik Harker are all due to speak. at a Philly Fed conference where the theme is the ‘new normal’.

Overnight

On global stock markets, the S&P 500 is -1.5. Bond markets saw US 10-years +14.98bp to 2.19%. On commodity markets, Brent crude oil +1.86% to $43.28, gold-0.1% to $1,053, iron ore -2.6% to $41.13. AUD is at 0.7346 and the range has been 0.7284 to 0.7350Copy and paste here. Change font to 10 pitch. Remove the bullet points.

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• Markets Today: 4 December 2015 (PDF, 271KB)

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