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ECB Seen Joining Central Banks In Turning on the Liquidity Spigots

Tarek El Sombati | E+ | Getty Images

With reassurances that the Fed will keep on easing, markets turn their attention to the European Central Bank Thursday, hoping for a rate cut and anything else that could juice the euro zone economy.

The ECB is widely expected to cut its main refinancing rate, by 0.25 to 0.5 percent. The Fed Wednesday kept its "quantitative easing" or bond buying program in place and added language to its statement, making it clear that it could increase the size of its QE program, as well as pare it back, depending on the job market and inflation. Many market participants believe the Fed's next move would be to start tapering back the purchases.

Besides the ECB, investors will be watching weekly unemployment claims data, international trade and productivity and costs, all at 8:30 a.m. ET. There are also chain store sales reports for April and dozens of earnings reports, including General Motors, Royal Dutch Shell and Siemens.

The ECB statement is expected at 7:45 a.m. ET and will be followed by a press briefing by ECB President Mario Draghi. "The most we should expect is they come through with a rate cut," said George Goncalves, Treasury strategist at Nomuras America. "The wild card is if they introduce some kind of lending program to help small business. The non-performing loans continue to stack up on the balance sheets of banks. They need to get credit into the system."

"If they did some sort of a lending facility, that would be helpful," he said. "They won't do QE (quantitative easing), and they won't do shock and awe. It's Europe. They'll drag this thing out."

(Read More: Italy's New Government Passes First Market Test)

Besides surprising markets with the addition to its statement on the potential for increasing asset purchases, the Fed turned up the heat on lawmakers by saying fiscal policy is restraining economic growth. The Fed is purchasing $85 billion a month in Treasury and mortgage securities in an effort to hold down rates and push investors toward riskier assets. Some Fed officials have said the Fed should begin tapering the purchases as early as this summer, but a string of weaker economic reports has convinced markets the Fed won't start winding down the program until later in the year or early next year.

"If they start cutting QE, I think the idea that they could start raising the purchases at a later date is a way of softening the blow to the market, and limiting the fallout as well," said Alan Ruskin, Deutsche Bank head of G-10 Currency Strategy.

Some traders took the comment as a sign the Fed may be seeing a worsening economy on the horizon, and that it will need to act further, but Ruskin said it should not necessarily be taken that way. "I think this is a story of QE flexibility rather than QE for eternity," he said. He added that it's a way for the Fed to dial up or down its purchases as needed, but it does not mean QE will end any time soon. "I think this was nicely timed," he said.

Ruskin said it would be difficult for the ECB to adopt a new small and mid-sized business lending program. since it would be complicated and administered by national central banks, not the ECB.

"I think they're struggling to come up with an announcement that comes up with some sort of unorthodox policy," he said. "They've been looking at issues related to collateral rules, making it easier for smaller and medium enterprises to borrow money more easily…they are have a difficult time coming up with something that doesn't result in different risks for different national central banks' balance sheets."

(Read More: Why ECB's 'Super Mario' Could Struggle Without Luigi)

There has also been ongoing speculation the ECB could cut its deposit rate, turning it negative from its current level of zero, but that is not seen as likely.

"Draghi, in his comments, could easily intimate that disinflation story, that they're taking note. I would have thought if anything, he's going to err on the more dovish side. It's hard to see this in any way being euro positive," Ruskin said.

Euro zone inflation eased to 1.2 percent in April, the lowest level since February, 2010, and below the ECB's target 2 percent rate. Unemployment in the euro zone is also at a record 12.1 percent, with 19.2 million people out of work, the highest level since the single currency was created in 1999.

Weak employment data also continues to worry U.S. markets. The ADP private sector payroll number for April was reported at 119,000 Wednesday, about 30,000 less than expected. That hurt sentiment as traders viewed it as a warning that the April jobs report could be weaker than expected Friday, after March's surprisingly low 88,000 nonfarm payrolls. According to Reuters, economists expect 145,000 nonfarm payrolls in Friday's announcement.

Stocks sold off into the Fed's 2 p.m. ET announcement Wednesday, and continued to sell off into the close. The Dow lost nearly a percent, falling 138 points to 14,700, while the S&P lost 14, to 1582, after closing at an all-time high the day earlier. Both indexes had their worst first trading day of any month since June, 2012 and worst Fed day since Sept. 21, 2011.

"The market has thrown off the softening economic data because of Central Bankers, and finally today and tomorrow everything is out on the table from Central Banks," said one trader. "I think we're just approaching one of those 'sell on the news moments' and the fact that all this Central Bank action is only creating inflated asset prices and nothing else"

The ECB and Fed actions highlight the focus of global central banks on easing, as the world economy sputters along. The Bank of Japan has also embarked on a massive easing program, announcing 7.5 trillion yen in monthly debt purchases.

(Read More: Why an ECB Rate Cut Could Be Too Little, Too Late)

"The call (to ease) is a higher calling in the eyes of policy makers. They want to make sure they see us through this mess. The fact we're still in these easing programs means the coast is not clear. It doesn't mean we have to have a repeat of 2008," said Goncalves. "The stock market is very resilient. It's been operating for many reasons higher than where it should be due to debt, buybacks, you name it." The S&P 500 is up nearly 11 percent, year-to-date.

Treasurys saw buying ahead of the Fed's afternoon statement, driving the 10-year yield to 1.61 percent, the lowest level since December, but after the meeting it moved back up to 1.63 percent. Some traders are concerned about what the low Treasury rate is signaling at a time when stock prices are near record levels. "That should alarm people in equities," a trader said.

Goncalves said he expects the 10-year yield to dip to as low as 1.5 percent in coming weeks.

He said many investors bet wrong on the idea that when stocks go up, Treasurys go down. "I think that's been the widow-maker for this year. Both a stock rally and then bonds sell off was the wrong trade. If we were to see a stock pullback, it's hard to see a bond sell off either. It really means Treasurys stay lower for longer," he said.

What Else to Wach

There are also earnings from Cigna, Kellogg, Cardinal Health, CME Group, Churchand Dwight, Manulife Financial, Goldcorp, International Paper, Foster Wheeler,Plains Exploration, Marsh and McLennan, MGM Resorts, Beazer Homes, Western Refining, and PG&E, ahead of the market open. AIG and Kraft report after the closing bell.

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.