Risk Assets Get Boost from Dovish Draghi and US Fundamentals

Stocks rallied while Treasuries and swap rates fluctuated as markets reacted to dovish comments from ECB President Draghi, strong US data and corporate earnings, and the surprise postponement of next week’s 2-year auction.  The ECB kept its benchmark interest rate at 0.05%, as expected, but Draghi suggested that fresh stimulus is on the table at the December meeting.  Draghi said the ECB is considering a variety of options including further cuts to key interest rates and an expansion of quantitative easing.  The bond purchasing program was originally scheduled to end September 2016, but will now continue until the ECB sees a sustained increase in the inflation outlook.  Draghi’s dovish tone provided a boost for risk assets and caused the euro to sell off.

Today’s US economic data impressed and boosts the case for an interest rate hike before year end.  US home resales rebounded strongly in September (4.7% MoM, 2nd highest since 2007) and jobless claims remained near the 42-year lows from last week, indicating healthy housing and employment fundamentals.  The existing home sales report followed a strong new home sales report earlier this week, and the claims number is the 33rd consecutive week below the 300,000 threshold.  The August and September payrolls reports were disappointments, but those months are known for initially under reporting and it’s likely that employment growth will pick back up in October.

Aside from the data, we get a variety of corporate earnings and issuance and the $7 billion 30-year TIPS reopening.  There are no scheduled Fed speakers.