Macro Commentary

It’s about time.  It might be a year later then it should have taken, but the European Central Bank (ECB) finally followed through on quantitative easing.  After a series of leaks (testing market reaction?), ECB President Mario Draghi announced 60bln EUR per month in purchases through September 2016 putting the total right under 1.1trln EUR and on par with his goal of increasing the balance sheet to 2012 levels.  The market reaction suggests that the announcement exceeded its expectations at the margin.  After an already significant decline in EUR/USD before the actual program, the exchange rate continued its decline after its unveiling.  Equity markets around the world moved higher, though not “knee jerk” higher.  While we still need to review specifics of the plan, it is an overall step in the right direction for the Euro-area economy.  Currency devaluation supports the export economy and opens an opportunity that, with fiscal support, can result in creating some employment momentum over time.  From an earnings perspective, European companies have not seen a rebound in profit margins the way their US counterparts have.  Nominal growth can help along company top-line which should fall mostly to the bottom-line; not to mention a bit of a boost from currency translation compared to last year.  ECB President Mario Draghi did some fancy footwork dancing around his member country concerns with national central banks playing the primary role in executing the plan with an element of risk sharing and criteria for inclusion by countries currently financial support.  It is a clear message before the Greek election this Sunday.  We are yet to see details of what is being bought and whether there is any implementation issues by decentralizing execution but it should be worth the wait.

There was good news from China as well this week, but you wouldn’t know it by reading headlines.  The announcement of the 2014 full year growth rate of 7.4% led to news articles stating that it is the lowest in 24 years.  They are forgetting that the economic base by which the economy is growing is 3 times as large as it was ten years ago (2004) when it was growing at 10.1%.  That means that this past year’s GDP increase in nominal yuan terms is double the increase then.  Retail sales growth remained strong near 11% (compared to the US 2%) supported by wage growth of urban workers of 6.8%.  Chinese trade also improved with exports surging 9.7% year-over-year which, combined with a decline in imports, led to a trade surplus.  With key customers in the developed world getting more support, the world’s second largest economy appears to remain on track.