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Unchanged interest rates? Check. Rates at present or lower levels for an extended period of time? Check. QE to continue beyond target date if needed? Check. Underlying inflation pressures continue to remain subdued? Check. ECB stands ready to act using all the instruments available within its mandate? Che – wait, what?
In a small but significant victory to the more hawkish members of the ECB Governing Council and Euro observers in general, President Mario Draghi said the ECB felt it should remove the reference to “using all the instruments available within its mandate” as this was primarily driven by the risk of deflation which has now largely disappeared.
The ECB also upgraded its staff macroeconomic projections for inflation and GDP growth as it takes into account the recent string of positive data. In keeping with previous meetings though, Draghi was quick to emphasize that the Eurozone economy is still not out of the woods just yet and that further stimulus might be needed if the situation warrants it.
The slightly positive overall tone of the press conference was enough to spark a run in the Euro – up to over 1.06 against the US dollar – and a sell-off in core sovereign bonds. Yields on the 10-year German bund, long the main beneficiary of the ECB’s current policy, ended the day higher by almost 6 basis points.
Fed Data-Watch
But while the less-dovish stance of the ECB was welcomed by most market participants the focus will now switch to the other side of the pond, and with good reason. After Wednesday’s stellar US ADP job report (298,000 private sector jobs added versus forecasts of 190,000) expectations for a bumper non-farm payroll report are high.
With current market pricing, anything other than a huge miss should seal the deal for a 25 basis point rate hike next week by the US Federal Reserve. Yields on 10-year US Treasuries were last up to over 2.60%, and 30-year mortgage rates rose to a yearly high of around 4.21%.
The bond sell-off is also pronounced in other countries such as Australia and Japan, where yields are close to the Bank of Japan’s upper limit of 0.1% and may push the central bank to exercise ‘curve control’ in a bid to keep the number close to 0%.
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