Markets
This morning, core European and US bonds maintained recent gains as markets awaited the ECB policy decision. A modest risk off sentiment also supported safe haven bonds. The ECB as expected left its policy rates unchanged. At the same time, the ECB announced a new TLTRO financing program. Probably even more important for (interest rate) markets: ECB changed its forward guidance on interest rates. The ECB now indicates that it expects interest rates to remain at current low levels throughout the end of the year. Until now the ECB had only engaged to keep rates at these levels throughout the summer. In its staff projections the ECB also downwardly revised the growth and inflation forecasts, in particular for this year. At first, the reaction of European interest rates remained modest, but the decline in yields accelerated during the ECB press conference as the ECB president maintained an overall soft tone, including seeing downside risks to the economy. The EMU economy needs more support for longer. German yields are declining between 1.2 bp (30-year) and 3.8 bp (5-y). 10-y intra-EMU spreads over Germany narrowed today, but the moves are modest, with Italy slightly outperforming (-4bp). There were also spill-over effects from the decline in European yields on US bond markets. US yields are declining between -2 bp (30-yr) and 3.6 bp (5-yr). European equities and US equity futures reversed most of the intraday losses after the ECB policy decision, but there are no meaningful gains.
The ECB policy decision evidently was also the key driver for EUR./USD trading today. EUR/USD hovered in a tight range close to, mostly slightly above the 1.13 barrier going into the ECB policy decision. The ECB announcing a new LTLRO, program, the extension of the period of very low interest rates and the soft tone from ECB’s Draghj at the press conference all pushed EUR/USD below the 1.13 area. EUR/USD is currently trading in the mid 1.12 area. So the 1.12 range bottom of the MT term consolidation pattern is again coming on the radar. 1.1216 marks the November low. 1.1187 is 62% retracement of the 2017 low/2018 peak. Also interesting, the easy policy stance of the ECB had only very limited impact on USD/JPY. The pair is trading in well-known territory in the 111.70 area.
The set-up for sterling trading today was quite similar to yesterday. This morning, Halifax house prices showed a surprise jump of 5.9% M/M and 2.9% Y/Y. However, the impact on sterling trading of this housing market resilience was again very limited. Headlines/rumours from the EU-UK negotiations to reach a compromise on the Irish backstop suggested that no progress has been made yet. EUR/GBP trended higher EUR/GBP temporary revisited the 0.8620 area, but the pair was hammered back below the 0.86 handle after the ECB policy decision. Cable was dragged lower both by uncertainty on the outcome of the Brexit negotiations and by spill-over effects from the EUR/USD decline.
News Headlines
In its staff projections, the ECB downwardly revised the growth outlook for 2019 to 1.1% (from 1.7% in December) and for 2020 (1.6% from 1.7%). The outlook for 2021 was left unchanged (1.5%). At the same time, the ECB cut the inflation forecast for the entire policy horizon to 1.2% in 2019 (from 1.6%), to 1.5% in 2020 (from 1.7%) and 1.6% in 2021 (from 1.8). So, inflation is expected to remain below the ECB policy target by the end of the EBC policy horizon.
US jobless claims in the week ending March 2 were little changed at 223 000 (from 226 000 in the previous week), suggesting ongoing healthy and stable labour market conditions. US nonfarm productivity and unit labour costs in Q4 both exceeded expectations respectively at 1.9% (1.5% expected) and 2.0% (1.7% expected).
