The European Central Bank shocked the markets by dropping its main lending rate to a new record low of 0.25% today, amid worries of the EU dropping into a deflationary spiral amid record unemployment. As we reported yesterday, Eurozone inflation year over year for October rose at only 0.7%. The news sent Euro stocks higher, and pointed to a strong opening on Wall St.
The news of course depressed the euro, and strengthened the dollar (since the euro comprises over 50% of the DXY dollar index.) Both the dollar and U.S. stocks got another boost when third quarter GDP in the U.S. was reported at 2.8%, blowing away expectations of a decline to 2.0% from the second quarter’s 2.5%. The DXY dollar index shot up 1% in early morning trading, before some profit-taking set in.
First-time jobless claims in the U.S. dropped by 9,000 last week, as effects of the government shutdown dissipate. Last weeks number were revised upward by 5,000 claims, as California works the kinks out of its new computer system. The 4-week rolling average of first-time jobless claims dropped 9,250 to 2.87 million people on Federal unemployment.
Despite the strong U.S. GDP number (which, it should be remembered, shows the economy before the government shutdown,) the interest rate cut by the ECB lessens the pressure on the Fed to taper in December. Chairman Ben Bernanke has mentioned deflationary worries here in the U.S. recently, and could use the Eurozone inflation numbers as more reason to stand pat on quantitative easing.
It’s a whipsaw day for precious metals, as the ECB rate cut sent them straight up, then the GDP numbers sent them right back down. Once again, palladium pretty much marches to its own tune, and was the least-affected precious metal. Since precious metals are traded world-wide in dollars, a stronger dollar makes their price lower in dollars (i.e. precious metals price has a negative correlation to the dollar.) Gold, silver and platinum are recovering as the dollar spike this morning fades.
The remaining big economic news this week is tomorrow’s non-farm payroll report in the U.S., and the Chinese Communist Party policy meeting this weekend. Chinese and Hong Kong stock indexes were lower today, as banking shares took a hit. It is widely expected that the policy meeting will target the shadow banking market with the imposition of financial reforms. A major push against local government corruption has already been announced, targeting bogus infrastructure projects that local leaders use to line their own pockets.