In a surprise twist of events, the ECB’s meeting yesterday concluded with measures that failed to rise to markets’ expectations despite Draghi’s reputation of being a central banker that is willing to “do whatever it takes”. This is not to say that the ECB’s President shied away from adding to the stimulus program as he did effectively announce that the bond-buying program will go on for longer than earlier expected. However, the consensus among investors was that the monthly value of the programme will be increased from the current EUR60 billion target. In turn, the mix of steps taken yesterday increased the value of eligible securities, as bonds issued by regional and local governments were added to the list as were the instruments yielding between -0.3% and -0.2% (after the deposit rate was cut by 0.1 percentage points to -0.3%).
Apparently the disappointing scale of the new wave of monetary easing reflects ECB’s optimism on growth outlook as the bank’s staff kept its GDP forecasts unchanged despite trimming the inflation projections as “the persistence of low inflation rates reflects sizeable economic slack weighing on domestic price pressures and headwinds from the external environment.”
From my point of view, Draghi’s speech and clarifications provided in the Q&A session painted a rather mixed message as he failed to strike a convincing tone that these measures are sufficient and adequate and in turn gave the impression that ECB is trying to keep some fire power. The way I see it, the reaction of the markets in the aftermath of the meeting shows a similar interpretation. That is, despite the size of the new round of stimulus being smaller than expected, the stock markets should have escaped a strong dip should they have been persuaded in believing that the economic outlook is good enough not to warrant more than it was decided. The market measures of inflation expectations also suggest that Draghi’s message was not fully embraced by investors with the 5 year-5 year inflation swap closing the day lower.
At the other end, the reaction in the bond markets could signal that ECB’s more optimistic than expected message touched some hearts. The German bonds for instance (the benchmark Euro yield curve) experienced significant moves, with the 10 year rate spiking to close to 0.7% from less than 0.5% (equivalent to a price drop of 1.8%); furthermore, whereas the yields up to (and including) the 7-year maturity bucket were negative prior to the meeting, they rebounded strongly after the ECB press conference. Such a reaction could signal that investors a pricing in a better inflation/growth outlook but it could as well be that investors were positioned for additional liquidity. Indeed, the rally seen over the past few weeks suggests that yesterday’s correction was driven by technical factors not fundamentals.
As the markets strive to recover from yesterday’s disappointing session, they will also have to contend today with a string of labour market data coming from the US. In my opinion, a strong figure could help the US markets rebound even if weakness persists in the European space. For the USD high yield market another pivotal factor continues to be the oil price with the OPEC meeting perceived as a market driver.
Have a nice day!
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