The ECB, Deflation and Tom Brady

Following months of dialogue and bickering about the best way to fix Europe’s ailing economy, the European Central Bank (ECB) has embarked on a new course and has decided to follow in the footsteps of the Federal Reserve, the Bank of England, and the Bank of Japan.

Beginning in March, the ECB will coordinate the monthly purchases of 60 billion euro (which is about 68 billion dollars) in bonds with newly printed cash.

The bond buys are intended to last until at least September of 2016, amounting to about 1.1 trillion euro.  However, the purchases could go longer depending on whether it is meeting its goal for inflation.

So what concerns does this cause?  Well for one, the specter of deflation.  But there is also a heavy need to restore confidence and provide a better environment for economic growth in the 19 nations which share the euro.

It’s a lot to ask for from monetary policy alone.

So the first thing that happens is that government bond yields (Mom – that basically means interest rates) in Europe continue to trend lower. In fact, they are setting records in Germany, France, Spain, and Italy.

The euro depreciates against the U.S. dollar because lower interest rates make a currency less attractive to hold.  The aggressiveness of this open-ended commitment to buy bonds forced an additional 3.5% drop versus the dollar on Thursday and Friday. The dollar is currently at its highest level in over 11 years.

This is good for the U.S. consumer and for the U.S. traveler.  Imports into Europe will become more expensive, which is good for inflation (meaning that an increase in costs keeps deflation at bay) but bad if wages don’t accelerate.

Earnings Season

We follow Bespoke Investment Group for earnings research.  So far, about 179 companies have reported their earnings and revenue for the fourth quarter (4Q) of 2014.  Here’s where we stand:

• The percentage of companies beating their revenue estimatesfor the 4Q currently sits at 60.1%. This number is currently right at the average of 60% that we’ve seen since 2001, but above the 57.2% that finished up the 3Q of 2014, and hovering around the 60.7% that we saw in the 2Q of 2014. Since the revenue readings bottomed out in the 4Q of 2011, quarter-over-quarter readings ping pong but the trend has been steadily moving UP for revenues.

• The percentage of companies beating their earnings estimatesalso stands at 60%.  This is below the 62.1% final reading from the 3Q of 2014, but above the 58.6% final reading from the 2Q of 2014.

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