3 Things: ECB QE, ISM, September

Could Additional ECB QE Cure The US Market

This morning the European Central Bank (ECB) seemed forced to “do something” given the recent market weakness. With inflation expectations collapsing, markets declining and economic growth weak, the best hope for market “bulls” at the moment was an expansion of the ECB’s current QE program.

Mario Draghi, head of the ECB, did not fail to deliver by increasing the share limit for QE from 25% to 33% (the size of the program was NOT increased). However, ironically, they also cut inflation forecasts for 2015-2017. I say ironically because the QE program is specifically meant to drive inflation towards to the magical 2% mark. 

The question is whether an expansion the current QE program will have any real impact on the markets, inflation or economic growth?

It was just six months ago that the ECB launched their initial quantitative easing program to much fanfare and hopes of a swift economic recovery. So far, results have been disappointing. As noted by The Economist:

“GDP in the second quarter of 2015 from Eurostat are disappointing. The consensus among economists was that the 19-strong currency club would grow by 0.4%, the same as in the first quarter. Instead the pace of quarterly growth slowed a little, to 0.3%, leaving output 1.2% higher than a year ago.”

Inflation has also been non-existent despite the ECB’s monetary interventions. Consumer prices in the Eurozone are barely higher than now than a year ago. As stated above, at just 0.2% currently, the ECB has a long way to go, as does the Federal Reserve, to reach target levels of 2%.

However, for investors, it is the potential impact of additional ECB QE on the domestic markets that counts. The problem is that all QE programs are not equal. As shown in the chart below, I have noted the Fed’s QE programs and the effect on domestic markets and the ECB’s program. 

Click on picture to enlarge