Higher Volatility Ahead

The European Central Bank chose to maintain the benchmark interest rate at 0.05% in yesterday’s decision as traders focused on the commentary from Mario Draghi’s subsequent press conference. Aside from mentioning that the Central Bank has no official strategy for exiting quantitative easing, his warnings were heard loud and clear across markets. In his remarks, he noted that “markets must get used to periods of higher volatility.” The immediate reaction was as selloff in bonds across Europe as American bonds also fell while the Euro squeezed higher. The ECB’s growth expectations for 2015 remained intact at 2015 despite the OECD cutting global growth prospects yesterday. News from Brussels was sparse as Greek Prime Minister Tsipras meets with regional leaders to find a compromise. No deal has been announced yet as commentary remains cordial ahead of the looming deadline. The Euro has retreated modestly from yesterday’s exuberance, pulling back from recent gains.

After recording a particularly weak print in the previous month, ADP nonfarm payrolls managed to rebound back above 200,000 in May, printing at 201,000. Most of the jobs added came from the services sector as manufacturing continues to experience losses. Construction employment rose substantially and while over 12,000 jobs were added in financial activities, banks look poised to announce layoffs after the recent announcement from HSBC about cutting the global workforce. Aside from employment numbers which will likely foreshadow a stronger nonfarm payroll number tomorrow, the US trade deficit managed to improve solidly in April on renewed growth in exports as imports fell by approximately 3.30%. After reaching a 6-year high of $51.4 billion in March, the trade deficit April managed to shrink by nearly 20% versus the prior month. The dollar rebounded modestly on the data before a squeeze higher in the Euro saw momentum against peers reverse.